China money rates plunge as quarter-end pressure eases

Fri Apr 4, 2014 12:30am EDT

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By Pete Sweeney
    SHANGHAI, April 4 (Reuters) - China's major money rates
plunged on Friday morning as cash flooded back into the market
as demand to make quarter-end payments eased.
    The benchmark seven-day bond repurchase rate 
spent most of the week trading above 4 percent, but on Friday it
opened at 3.00 percent, down more than a full percentage point
from Thursday's close. Ensuing trades pulled the weighted
average down further to stand at 2.99 percent by late morning.
    One trader said the surprisingly low opening quote was
likely set by a large transaction by a larger state-owned bank,
which managed to dictate market sentiment going forward.
    That marked a weekly decline of over 122 basis points for
the contract.
    The 14-day contract also slid, albeit more
gradually over the course of the week, to end down 119 basis
points.
    The overnight repo was largely flat, but gained slightly by
week-end to 2.77 percent, a weekly gain of 2.25 basis points.
    Markets were heartened by a relatively mild drain executed
by the central bank this week during open market operations,
which saw the People's Bank of China pull 62 billion yuan ($10
billion) out of the interbank market.
    Traders are concerned going forward that pressure for
upcoming tax payments in April, plus more bond issuances in the
pipeline, will diminish supply, causing rates to rise again.
    "It's clear that the monetary authorities will not choose
easing as part of its efforts to boost the economy for now,"
said a dealer at a major Chinese state-owned bank in Shanghai.
    "The market believes at least for the second quarter, the
PBOC will neither cut RRR nor official interest rates."
    But this is not a matter of consensus, given uncertainties
about what the PBOC's long-term intentions are towards the
interbank market. Last year saw the bank either tolerating or
provoking rises in rates, which many said was intended as a
swipe at shadow banking activities, but beginning in February
short-term rates have been extremely accommodative.
    This, in the context of weak recent macroeconomic data, has
some speculating that Beijing is in fact getting ready to ease
up on the money supply to keep growth on track, even reduce the
reserve-requirement ratio, which would pour long-term base money
into the system.
    Zhang Zhiwei, an economist at Nomura Securities in Hong
Kong, argued as much, saying that recent announcements about
increases in railway spending and shantytown upgrades suggest
easier policy is on the way.
    "This is important in our view, as it suggests credit supply
(as measured by total social financing) may pick up in Q2 ... We
reiterate our view that both monetary and fiscal policies will
be loosened in Q2," he wrote in a research note on Wednesday.
    Others, however, believe the decline in rates was a side
effect of an intervention to suppress the yuan exchange rate and
shake out speculators; as that campaign winds down over the next
few months, Beijing will return to the relatively more elevated
rate regime seen in 2013, continuing to encourage banks and
corporates to deleverage. 
    "The Chinese leadership clearly wants to see a stable growth
rate," wrote GaveGal Dragonomics economist Joyce Poon in a
research note, arguing that stable employment is required to
push forward other structural reforms.
    But Poon also doubted Beijing is preparing to reembark on a
stimulus spending spree.
    "China's leaders are well aware of the dangers that massive
credit expansion and distorted state sector investment
incentives would pose to the country's economic health."
    For its part, the PBOC has simply reiterated it will
maintain a prudent monetary policy going forward.
    The China Banking Regulatory Commission (CBRC) said on
Friday that it will conduct regional and national stress tests
after banks saw a spike in bad loans last year, the Shanghai
Securities News reported on Friday, reflecting growing
creditworthiness concerns. 
    
SHORT TERM RATES: 
 Instrument      RIC            Rate*     Change (weekly,
                                          bps)**
 1-day repo      CN1DRP=CFXS        2.77               2.25
 7-day repo      CN7DRP=CFXS        2.99            -122.85
 14-day repo     CN14DRP=CFXS       4.28            -119.01
 7-day SHIBOR    SHICNYSWD=         4.10               -6.5
 
*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=     3.0009              0
 year benchmark *                             
 5 yr 7-day repo swap  CNYQB7R5Y=     4.6600            166
 1 yr 7-day repo swap  CNYQB7R1Y=     4.4100            141
 
*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)
 Jun 2014 5 yr     CTFM4        92.32             -24.30
 Sep 2014 5 yr     CTFU4        92.78             -23.25
 
        >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   
    MARKET DRIVERS
    - China to reform money market pricing to eliminate
manipulation-sources 
    - China's central bank opens liquidity front in hot money
war 
    - China's attack on yuan speculators risks backfiring
 
    - Market braces for bouts of tight liquidity in 2014
 
    - Beijing eases corporate debt rules to offset crackdown
 
    
    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 = 6.2107 Chinese Yuan)

 (Additional reporting by Lu Jianxin and Chen Yixin; Editing by
Chris Gallagher)
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