UPDATE 1-China's SHIBOR spikes on reform speculation but benchmark rates slide

Thu Dec 5, 2013 11:23pm EST

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* 3-month SHIBOR rate at highest since mid-year cash crunch
    * Money rates fall even as c.bank drains liquidity
    * Benchmark 7-day repo down 16 bps over the week

 (Adds background, wider money conditions)
    By Pete Sweeney
    SHANGHAI, Dec 6 (Reuters) - China's money rates eased
slightly this week despite a massive 47 billion yuan ($7.72
billion) drain by the central bank during open market
operations, but rates remained elevated as sentiment was
cautious.
    Corporate and treasury bond yields hovered at relatively
high levels, while the three-month SHIBOR rate 
jumped to 5.1670 percent, its strongest level since a cash
crunch in June through early July pushed the rate as high as 5.8
percent.
    The cash crunch in China began in late June and lasted
through early July when the central bank refrained from
injecting adequate cash to meet market demand. Rates remained
elevated through mid-July as banks scrambled for funds.
    However, analysts said that the SHIBOR spike was speculative
this time around, based on statements by the central bank that
it would move ahead to implement negotiable certificates of
deposit (NCDs), which many believe would be based on the
three-month SHIBOR.
    "NCD is very similar to inter-bank lending and bond
repurchase agreement, but should be more liquid as it can be
traded," wrote Hao Zhou and Liu Ligang of ANZ Bank in a research
note commenting on the rise. 
    "As it will be linked to SHIBOR, the market believes that
the SHIBOR, especially in tenors longer than one month, will
better reflect actual demand/supply conditions."
    But other major liquidity indicators slid. The
volume-weighted price for the benchmark seven-day repo
 declined by more than 16 basis points over the
course of the week, to 4.55 percent by midday on Friday. 
    The overnight repo rate declined slightly but
the 14-day tenor plunged by more than a full
percentage point
    Traders consider rates over 4 percent indicative of
relatively tight conditions, but they also believe the new range
is the new normal as the central bank moves to suck excess
liquidity out of the system.
    "Actually, there's no shortage of cash in the system," said
a trader at a Shanghai bank.
    "It's a few big banks that are dragging rates up, and they
are all the long-term rates, three-month tenors."   

SHORT TERM RATES: 
 Instrument      RIC              Rate*  Change (weekly,
                                         bps)**
 1-day repo      CN1DRP=CFXS       3.70             -6.27
 7-day repo      CN7DRP=CFXS       4.55             -16.6
 14-day repo     CN14DRP=CFXS      5.02           -105.42
 7-day SHIBOR    SHICNYSWD=        4.56             -10.8
 
*The volume-weighted average price (Vwap) at midday Friday
** Compared to the Vwap at market close the previous Friday
 
KEY INTEREST RATE SWAPS:
 Instrument            RIC              Rate   Spread
                                               (bps)*
 2 yr IRS based on 1   CNABAD2YF=        2.98            -2
 year benchmark                                
 5 yr 7-day repo swap  CNYQB7R5Y=        4.87           187
 1 yr 7-day repo swap  CNYQB7R1Y=        4.78           178
 *This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise.                

GOVERNMENT BOND FUTURES
 Contract       RIC       Rate*      Change (weekly,  Pct
                                     bps)**           change
 3-Dec          CTFZ3      93.79075          -55.245   -0.59%
 4-Mar          CTFH4     93.891875         -59.5225   -0.63%
 4-Jun          CTFM4      93.96915          -61.055   -0.65%
       
        >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - China regulator drafts new rules to tame shadow banking
 
    - China corporate financing squeezed as reform plans spark
rate spike 
    - Unprecedented securitisation plan aims to slow rapid money
growth 
    - China investors face bumpy ride as reform speculation
intensifies 
    
    DATA POINTS
    - Flows of external liquidity into China's money market
GRAPHIC: link.reuters.com/pem75t
    - Impact of maturing central bank bills and repos GRAPHIC: r.reuters.com/vyr95t
    - Chinese government bond curve steepens as growth fears
ease GRAPHIC: link.reuters.com/jyr95t
    - China's interest-rate swap curve steepens as growth
prospects improve GRAPHIC: link.reuters.com/ryr95t
    - China corp bond spreads widen on rate reform prospects
GRAPHIC: link.reuters.com/bas95t
    - China hot money tracker: Hot money returned to China in
Sept after two months of outflows GRAPHIC: link.reuters.com/saz74t
    
    
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   

($1 = 6.0913 Chinese yuan)

 (Additional reporting by Chen Yixin; Editing by Jacqueline
Wong)
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