UPDATE 3-China money rates close up sharply, c.bank seeks to quell alarm

Thu Dec 19, 2013 5:35am EST

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By Pete Sweeney

SHANGHAI, Dec 19 (Reuters) - China's short-term money rates posted alarming spikes for a second day on Thursday after the central bank refused to inject money into the market to alleviate the crunch, raising fears that regulators are engineering another cash squeeze similar to the one that roiled global markets in June.

Most traders suspected the People's Bank of China (PBOC) was sending a message targeting specific players in the murky world of Chinese shadow banking.

But, they also saw risks of unintended knock-on effects on economic sentiment, particularly at a time when the U.S. Federal Reserve has begun to wind down an aggressive easy money strategy, that had helped fuel growth in the emerging world.

"This is a complete mess," said a trader at a major state-owned bank in Beijing, pointing to the PBOC's decision to hold off from injecting funds for a fifth consecutive session as the reason for the spike. "Market sentiment is not good," he said. While another said the market was "traumatised" by the PBOC's stance.

As traders scrambled to cover, the PBOC decided to extend trading by 30 minutes to give more time for settlement.

The PBOC also announced on its microblog feed that it had injected funds into the market through short-term liquidity operations (SLOs), without specifying the amount or the date -- an apparent attempt to assure the market that it was making liquidity available in order to cope with end of year tax flows.

"If necessary, the bank will continue to provide liquidity support using SLOs in accordance with the fiscal situation, depending on the condition of financial institutions," the microblog statement said.

One-year interest-rate swaps based on the benchmark seven-day repo rate, which typically reflect liquidity conditions, closed at 4.97 percent, a record high.

The average price for the seven-day repo itself closed at 7.0852 percent, the highest since June 26, with individual quotes going as high as 9.8 percent, compared with an opening quote of 4.85 percent.

Other short-term rates also rose sharply, although by lesser degrees, while the volatility caused widespread activity in the market.

In recent weeks, bond and trust loan rates have risen to record highs as part of a broader tightening trend.

"The market needs a lot of money," said Zhou Hao, China economist for ANZ Research in Shanghai. "If you look at seasonal patterns, traditionally the commercial banks always have a lot of assets to role over at the end of the year."


Chinese share markets have not reacted dramatically to the money market, as they did in June, when many investors misinterpreted the PBOC's behaviour as a sign that it aimed to push up long-term rates.

But share indexes have been on a sustained slide for most of this month, with the CSI300 index losing 5.5 percent over the last 11 trading days.

However, traders said they still wanted more transparency from the PBOC.

In addition to suppressing shadow banking, economists believe the PBOC is also trying to establish a "new normal" for China's financial system, in which key benchmark rates remain relatively elevated but fundamentally stable, in order to encourage a gradual reduction of excess credit creation without affecting the lending that supports the real economy.

Shadow banking did grow as a share of total financing in November, but most economists say the data shows that the most unhealthy forms of shadow banking - in particular discounted bankers acceptance notes and entrusted loans - have been more or less tamed.

(Additional reporting by Gabriel Wildau and Chen Yixin; Editing by Chris Gallagher and Simon Cameron-Moore)

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