China money rates end week mixed as injection relief wears off

Fri Jan 24, 2014 1:25am EST

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SHANGHAI, Jan 24 (Reuters) - China's money rates ended the
week in mixed territory after the central bank attempted to head
off another liquidity crunch on Monday with substantial cash
injections, but traders are still anxious about cash supply.  
    Cash conditions relaxed after funds injections by the
People's Bank of China (PBOC) on Tuesday and Thursday, but
tightened on Friday, indicating sustained pressure on the
interbank market was likely to last into next week.  
     Market watchers said cash has been sucked out of
ciruclation by seasonal demand for funds ahead  of the week-long
Lunar New Year festival in February, combined with a resumption
of initial public offerings (IPOs) in China this month.  
    The benchmark weighted-average seven-day bond repurchase
rate stood at 4.5384 by midday, down 67.02 basis
points compared to last week's close, and down even more
significantly from a high of 6.5920 it hit on Monday. 
    But, commonly traded rates remained up for the week and
climbed on Friday despite massive fund injections during open
market operations on Tuesday and Thursday. 
    The overnight repo rate rose over 72 basis points to 3.7171
at midday on Friday and 14-day repo stood at 6.8935, a jump of
70.56 bps from the day before and up over a full percentage
point week-on-week.
    This suggests nervousness in the market, even after the
central bank injected a net 375 billion yuan during open market
operations this week, and some traders suspected that  the
decline in the seven-day repo rate was not indicative of true
market conditions.
    "The decrease of the seven-day repo rate reflects more the
state of short-term liquidity demand over the next two or three
days, instead the de facto seven-day transactions which actually
steps into the holiday period," said a trader from a city
commercial bank in Shanghai.   
    
    INJECTION SERIES
    China experienced a series of dramatic cash crunches in the
interbank market in 2013, and it appeared another one was on the
way on Monday, when the seven-day repo rate again traded at 10
percent at one point. 
    To relax the market, the People's Bank of China (PBOC)
injected 375 billion yuan ($61.97 billion) into the interbank
market -- 120 billion yuan of which via 21-day reverse repos
that will keep cash in the system for the duration of the
upcoming holiday week. 
    The central bank also announced that it had provided cash to
major banks and smaller financing institutions through the
standing lending facility (SLF). 
    But this was the first open market operations this year, and
traders believe the PBOC is sticking to its de facto tightening
stance in order to discourage risky shadow banking activities
and encourage corporate deleveraging.
    
    OFFSETTING EFFECTS
    Liquidity conditions seem to be improved, but not so much
that market participants have relaxed their vigilance, given the
likelihood that this week's fund injection could be quickly
offset by other factors.
    "Short-term concerns may have been relieved, but the market
is still worried about what will happen after the Spring
Festival," said a trader from a foreign bank in Shanghai.
    Some predicted a return to monetary hard-ball after the
holiday, as the central bank continues to engineer a long-term
rise in money rates to discourage banks from abusing the
interbank market to cover their riskiest bets.
    "Mother Central Bank injected funds, but it is still
determined to kill pigs," wrote a commodities trader
microblogging under the name Hedge Soldier.
    By "pigs," he was referring to the commercial bankers
dabbling in shadow banking and evading regulations that
regulators have been attempting to suppress.
    "In the new year, she'll be back to killing pigs," Hedge
Soldier said.
    Cash demand for the upcoming holiday is always a major
factor in China's money markets this time of year, but in 2014
another factor -- the resumption of IPOs -- has proven a dud so
far.
    IPOs usually require funds to be frozen for short periods of
time during the subscription period, and if the IPO is large,
the impact of this freeze can impact short-term rates. 
    However, so far the resumption has had little noticeable
impact on the money market.
    
                   
 SHORT TERM RATES: 
 Instrument      RIC                  Rate*    Change (weekly,
                                               bps)**
 1-day repo      CN1DRP=CFXS             3.71            72.94
 7-day repo      CN7DRP=CFXS             4.50           -67.02
 14-day repo     CN14DRP=CFXS            6.85           114.14
 7-day SHIBOR    SHICNYSWD=              4.45            -3.27
 
*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=     2.9878           -1.22
 year benchmark *                               
 5 yr 7-day repo swap    CNYQB7R5Y=     5.0000             200
 1 yr 7-day repo swap    CNYQB7R1Y=     4.8500             185
 

*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       92.09            47.12
 Jun 2014 5 yr     CTFM4       92.58            40.15
 Sep 2014 5 yr     CTFU4       92.79            29.54
 
          
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - China eases Jan credit squeeze with cash, surprising
transparency 
    - Market braces for bouts of tight liquidity in 2014
 
    - Beijing eases corporate debt rules to offset crackdown
 
    - China corporate financing squeezed as reform plans spark
rate spike 
    
    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 = 6.0517 Chinese yuan)

 (Reporting by Shanghai Newsroom and Lu Jianxin; Editing by Pete
Sweeney and Simon Cameron-Moore)
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