China's overnight money rate tumbles, but longer-term funding still tight

Mon Jun 17, 2013 12:28am EDT

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* Overnight rate falls 219 bps to 4.84 percent
    * Refunds on required reserve deposits boost liquidity
    * But seven-day, 14-day and longer rates still sky high
    * Banks focused on securing funding for quarter-end period
    * Sharp decline in forex inflows hits liquidity

    By Gabriel Wildau
    SHANGHAI, June 17 (Reuters) - China's overnight funding rate
fell to its lowest level in two weeks on Monday, as a severe
liquidity strain afflicting the money market eased, but
longer-term rates remained at historically high levels due a
sharp decline in foreign capital inflows.
    The weighted-average, one-day bond repurchase rate
 dropped to 4.73 percent on Monday morning, down
from 7.03 percent on Friday. 
    The drop represents a significant improvement in conditions
compared to last week, when some institutions were desperate for
immediate cash simply to meet current liquidity needs. 
    But the benchmark seven-day repo rate barely budged from
last week's extremely high levels, reaching 6.85 percent on a
weighted-average basis, compared to 6.90 percent on Friday. 
    Traders and analysts say an abrupt slowdown in foreign
exchange inflows is a major factor contributing to the lack of
liquidity. 
    Data released on Friday showed that Chinese banks, including
the central bank, purchased only 66.9 billion yuan ($10.9
billion) in foreign exchange in May, down from 294.4 billion in
April and a record-high 683.7 billion in January.
 
    Forex purchases by the central bank add to China's domestic
base money supply, increasing interbank liquidity.
    The continuation of high rates also reflects uncertainty
about whether the central bank will inject funds into the market
more actively this week. So far, it has not acted aggressively
to ease the funding stresses.  
    The People's Bank of China injected a net 92 billion yuan
($15.0 billion) into the market last week, a small amount
relative to the severity of the funding strain. 
    Moreover, the injection occurred entirely via the maturity
of bills and repos issued in previous weeks. The bank did not
actively inject cash by issuing reverse repos, as many market
participants had hoped. 
    This week, with only 32 billion yuan in bills and repos due
to mature, the PBOC will have little choice but to resort to
reverse repos or other measures if it wants to ease funding
conditions significantly.
    An article on Monday in a PBOC-backed newspaper, the
Financial Times, quoted unidentified sources as saying that
overall liquidity in the interbank market was sufficient but
that some individual banks were suffering liquidity problems
because they had relied too heavily on short-term interbank
funding and exceeded regulatory caps on landing. 
    The sources said the PBOC would not step in to provide
liquidity to individual banks that had behaved irresponsibly.
    With the drop in overnight rates, traders say the market's
focus has now shifted to the challenge of securing funds for the
cross-month period from end-June to early July. 
    Banks traditionally push to attract deposits at the end of
each month, and particularly at the end of each quarter, to
prettify their quarterly financial statements for regulators,
shareholders, and internal evaluations. 
    The 14-day repo rate dropped to 6.4697
percent on Monday from 7.68 percent on Friday, while the 21-day
rate fell to 6.44 percent from 8.27 percent.
    
    RESERVE DEPOSITS
    Traders also said the improvement in overnight liquidity
reflects a reduction in the funds that banks are required to
hold at the central bank in order to comply with the required
reserve ratio (RRR) after June 15. 
    Banks are required to adjust the balance of reserve held at
the central bank on the fifth, 15th, and 25th of each month in
line with changes in the balance of their customer deposits. 
    Banks typically rush to attract short-term deposits at the
end of each month to prettify their month-end deposit totals.
That requires them to add to reserve deposits on the fifth of
each month. 
    But many short-term deposits typically flow back out into
wealth management products in the early days of each months.
Banks then receive RRR refunds on the 15th in line with the
decrease in deposits.    
    
                                 Current  Prev close  Change
                                       (pct)           (bps)  
7-day repo         6.8746     6.9016     -2.70
7-day SHIBOR           6.8480     6.8110     +3.70 
 Note: Repo rate is weighted average.
    
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    MARKET DRIVERS
    - China opens new front in war as yuan speculation distorts
export data 
    - China seeks to curb speculative flows without monetary
tightening 
    - Markets spin on liquidity switches 
    - Non-bank financing to rise in 2013 
    
    DATA POINTS
    - External liquidity tracker: FX purchases are main source
if liquidity injection in recent months GRAPHIC: r.reuters.com/das95t
    - Impact of maturing central bank bills and repos GRAPHIC: r.reuters.com/kas95t
    - Long-term Chinese govt bond yields slumped amid doubts on
growth GRAPHIC: r.reuters.com/jas95t
    - China's interest-rate swap curve has flattened GRAPHIC: r.reuters.com/has95t
    - China corporate bond spreads have narrowed slightly 
GRAPHIC: r.reuters.com/mas95t
    - Hot money tracker: Hot money inflows have returned in
2013, boosting liquidity GRAPHIC: r.reuters.com/was95t
    
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   

($1 = 6.1308 Chinese yuan)

 (Editing by Kim Coghill)
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