China money rates jump this week, markets brace for more volatility

Fri Jan 17, 2014 12:42am EST

Related Topics

* Liquidity tightens ahead of Spring Festival, tax payments
    * C.bank refrains from injecting money for 3 straight weeks
    * PBOC may act if benchmark rate rises above 7 pct - traders
    * PBOC official pledges to maintain adequate liquidity

    By Lu Jianxin and Gabriel Wildau
    SHANGHAI, Jan 17 (Reuters) - China's money rates jumped this
week as liquidity conditions deteriorated sharply ahead of the
Spring Festival holiday, with traders watching to see if the
central bank will maintain its passive stance and allow another
cash crunch to unfold.
    Cash demand typically rises ahead of China's Spring
Festival, or Lunar New Year, as households and corporates
withdraw cash to pay for holiday spending and year-end bonuses.
The holiday falls on Jan. 31 this year and will see the money
markets closed for a week. 
    Cash is also tight in January because companies start paying
income and other taxes for the previous year, which channels
funds out of commercial banks and into the state treasury,
traders said.
    The People's Bank of China (PBOC) did not conduct any open
market operations this week for the third straight week.
 The decision not to inject cash into markets continues
a tight stance that observers say is intended to curb
off-balance-sheet lending, which is often funded with interbank
borrowing. 
    But a senior PBOC official said in remarks published on
Friday that the central bank would use various tools to adjust
liquidity in a flexible way to help maintain appropriate growth
in credit and social financing. 
    China's benchmark money market rate, the seven-day bond
repurchase rate, was at 4.99 percent on a
weighted-average basis by midday on Friday, jumping 96 basis
points from the end of last week.
    The overnight repo rose 12 bps to 2.86
percent, while the 14-day repo was up 10 bps at 4.84 percent.
    "The rates have the potential to rise further ahead of the
Spring Festival," said a trader at major Chinese state-owned
bank in Shanghai.
    "But judging from December's experience, the PBOC is likely
to use tools like reverse repos and short-term liquidity
operations to come to the market's rescue when the weighted
average of the 7-day repo reaches around 7 percent."
    Demand for cash in the money market typically spikes at the
end of each quarter and around major holidays. The PBOC
engineered two interbank market squeezes in June and December,
refusing to aid the banks with large cash injections to cope
with elevated seasonal demand. 
    The refusal reflected the PBOC's unhappiness with banks'
lack of progress in deleveraging their interbank positions to
reduce financial risks. The central bank has led traders to
expect periodic bouts of tight liquidity in the money market
this year. 
    Tight money has caused China's interest-rate swaps linked to
the seven-day repo rate to jump.
    Five-year IRS of this type were quoted at 5.15
percent at midday on Friday, above the current level of the
underlying seven-day repo rate. 
    But swaps based on the benchmark one-year bank deposit rate
 have barely budged, indicating that the market is
not expecting authorities to raise policy rates. 
                   
 SHORT TERM RATES: 
 Instrument        RIC             Rate*    Change (weekly,
                                            bps)**
 1-day repo                         2.8585             +12.50
 7-day repo                         4.9869             +96.13
 14-day repo                        4.8389              +9.79
 7-day SHIBOR                       4.7760             +73.50
 *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                  2.9884           +1.16
 year benchmark                               
 5 yr 7-day repo swap                   5.15            +215
 1 yr 7-day repo swap                   5.05            +205
 *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       Price    Change
                                        (weekly, pct)
 Mar 2014 5 yr                  91.602           +0.06
 Jun 2014 5 yr                  92.168           +0.06
 Sep 2014 5 yr                  92.456           +0.03
          
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - Market braces for bouts of tight liquidity in 2014
 
    - Beijing eases corporate debt rules to offset crackdown
 
    - 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
    - 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
    
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   

 (Editing by Jacqueline Wong)
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