China money rates rise on quarter-end demand, default fears smoulder

Fri Mar 21, 2014 1:46am EDT

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* Default and other debt risks looms large in markets
    * Money rates believed more hit by seasonal demand
    * Official liquidity policy may ease on weak economy
    * PBOC already signals milder stance with moderate drain

    By Lu Jianxin and Kazunori Takada
    SHANGHAI, March 21 (Reuters) - China's benchmark money rates
rose sharply this week due to cyclical increases in cash demand
toward the end of the quarter, traders said, as worries of large
loan defaults increased.
    The weighted average of the benchmark 7-day bond repurchase
agreement rate stood at 3.6 percent at midday on
Friday, up a full percentage point from the close of last week.
    The overnight repo gained 66 basis points to
2.5 percent while the 14-day repo rose even more
sharply, jumping 123 bps to 3.78 percent.
    While firmer, the levels are nowhere near the peaks hit last
year during severe cash crunches in which rates rose to as high
as 30 percent in June, alarming domestic and global financial
markets.
    Traders closely followed developments in the country's debt
market amid reports of possible large loan defaults by property
and steel companies but the reports had limited impact on market
prices.  
    The five-year government bond futures contract maturing in
June, for instance, edged down only 0.26 percent to 
92.728 yuan by Friday midday, from the end of last week.
    A trader at an Asian bank said that money rates were rising
for cyclical reasons -- banks are setting aside money to burnish
their books for quarter-end reports to regulators -- and in
reaction to reports that less base money is flowing into the
banking system thanks to slowing foreign investment and a
softening yuan. 
    "Reports of some debt problems at Chinese companies have no
impact on the markets for now because money involved so far is
so little compared with the vast assets of Chinese banks, and
few believe widespread defaults, in particular by major
companies, will occur any time soon," the trader said.
    
    LIQUIDITY POLICY APPEARS EASIER
    Benchmark rates have been sliding steadily since late
January as the central bank eased liquidity, seen as a way to
shore up flagging growth and at the same time discourage hot
money inflows pouring into the country to cash in on a rising
yuan and high yields.
    Beijing has signalled that it will ease pressure on the
interbank market as the economy shows signs of instability, with
exports showing a dramatic slide in February and manufacturing
growth continuing to slow. 
    In its latest signal to allow more liquidity in the system,
the People's Bank of China (PBOC) drained just a net 48 billion
yuan from the banking system through its regular open market
operations this week. 
    Some economists believe the central bank may take stronger
steps to stimulate the economy, including a possible cut to
reserve requirement ratios at banks, which would inject a
massive amount of long-term base money into the system.
    Market pricing, however, continues to indicate that the PBOC
will not make any changes to benchmark interest rates right now.
    Two-year interest rate swaps, the main
indicator of market expectations of the central bank's next rate
move, stood at 2.97 percent at midday on Friday, or 2.89 bps
below the official one-year yuan deposit rate of 3 percent.
    
 SHORT TERM RATES: 
 Instrument        RIC             Rate*    Change (weekly,
                                            bps)**
 1-day repo                           2.50                +66
 7-day repo                           3.60               +100
 14-day repo                          3.78               +123
 7-day SHIBOR                         3.60               +107
 *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                  2.9711           -2.89
 year benchmark                               
 5 yr 7-day repo swap                   4.50            +150
 1 yr 7-day repo swap                   4.19            +119
 *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)
 Jun 2014 5 yr                  92.728           -0.26
 Sep 2014 5 yr                  93.152           -0.26
 Dec 2014 5 yr                  93.210            N.A.
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>    
    MARKET DRIVERS
    - Muted impact of capital inflows a step towards
liberalising deposits 
    - Tax man's attack on shadow banking startles markets
 
    - 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
    - China hot money tracker: Hot money inflows slow to a
trickle in Dec 2013 GRAPHIC: link.reuters.com/saz74t
    - 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
  
     >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   
($1 = 6.22 Chinese yuan)

 (Editing by Eric Meijer)
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