China money rates slide on easing liquidity but IPO pressure looms

Fri Jan 10, 2014 4:02am EST

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By Pete Sweeney
    SHANGHAI, Jan 10 (Reuters) - China's money rates slid
steadily this week even though the central bank continued to
hold off on injecting cash through open market operations, which
dealers attributed to a temporarily relaxation of liquidity
conditions as demand for cash eased.
    The weighted average of the benchmark seven-day repo rate
 declined by nearly 70 basis points this week to
4.03 percent on Friday afternoon, and other popular traded
tenors also declined.
    However, dealers remain uneasy over the potential impact the
relaunch of initial public offerings (IPOs) and the coming Lunar
New Year holiday week will have on money rates toward the end of
the month, and this has put upward pressure on interest rate
swaps.
    "New IPO issues are a worrying factor. Nobody knows how big
the impact will be, but it's in the background," said a trader
at a state-owned bank in Shanghai.
    Dealers' concerns are technical in nature, related to the
way IPO subscriptions are handled. In most cases, subscription
funds for IPOs are put in escrow for a short period of time
prior to the actual listing on the exchange. 
    When IPOs are very large - such as the pending one of
Shaanxi Coal, which aims to raise 9.8 billion yuan ($1.62
billion) - they can put major pressure on short-term cash
supply, pumping up short-term rates.
    That, combined with signs the central bank is willing to
tolerate frequent spikes in short-term rates in the service of
getting shadow banking under control, has dealers speculating
another crunch may come in late January. Spikes occurred in
June, October and December.
    Five-year default swaps in China are trading
at nearly 90 basis points, their highest since September, and
have risen by 20 bps during the past three weeks.
 
    The Lunar New Year holiday, which will see financial markets
close for a week, puts massive pressure on the banking system's
cash supply as families withdraw money for travel, gifts and
banquets.
   This year, markets will be closed from Jan. 31 through Feb.
6. 

SHORT TERM RATES: 
 Instrument      RIC                  Rate*    Change (weekly,
                                               bps)**
 1-day repo      CN1DRP=CFXS             2.75           -17.59
 7-day repo      CN7DRP=CFXS             4.03           -67.04
 14-day repo     CN14DRP=CFXS            4.74           -76.14
 7-day SHIBOR    SHICNYSWD=              4.04              -67
 

*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=     3.0011              0
 year benchmark*                                 
 5 yr 7-day repo swap     CNYQB7R5Y=        5.1            210
 1 yr 7-day repo swap     CNYQB7R1Y=       4.99            199
 

*This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise.                

GOVERNMENT BOND FUTURES
 Instrument        RIC         Rate     Change (weekly,
                                        bps)
 Mar 2014 5 yr     CTFH4         91.50            -7.34
 Jun 2014 5 yr     CTFM4         92.05            -4.18
 Sep 2014 5 yr     CTFU4         92.36            -5.44
 
       
        >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - China default swaps flash amber as heavy bond supplies
loom 
    - Market braces for bouts of tight liquidity in 2014
 
    - China regulator drafts new rules to tame shadow banking
 
    - China corporate financing squeezed as reform plans spark
rate spike 
    - China investors face bumpy ride as reform speculation
intensifies 
    
    DATA POINTS
    - Fiscal deposits drive interbank liquidity trends GRAPHIC:
link.reuters.com/pem75t
    - Maturing central bank bills and repos upcoming GRAPHIC: r.reuters.com/vyr95t
    - Chinese government bond curve rises on rate reform
expectations GRAPHIC: link.reuters.com/jyr95t
    - China's interest-rate swap curve rises, flattens on
liquidity fears GRAPHIC: link.reuters.com/ryr95t
    - China corp bond spreads widen on risk aversion GRAPHIC: link.reuters.com/bas95t
    - China hot money tracker: Large hot money inflows to China
in late 2013 GRAPHIC: link.reuters.com/saz74t
    
    
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   

($1 = 6.0550 Chinese yuan)

 (Additional reporting by Shen Yan in BEIJING; Editing by
Richard Borsuk)
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