China's money rates tumble on liquidity; monetary easing not expected

Fri Apr 18, 2014 1:30am EDT

Related Topics

* Abundant liquidity seen lingering in medium term
    * Weak economic growth dampens cash demand
    * Banks cut interbank business after clampdown last year
    * No need for RRR or interest rate cut in Q2 - traders

    By Lu Jianxin and Gabriel Wildau
    SHANGHAI, April 18 (Reuters) - China's short-term funding
costs slumped this week amid an abundance of money market
liquidity, driven partly by weaker demand for funds as economic
growth slows, traders said.
    Liquidity was likely to be comfortable in the medium-term as
banks appear to have reduced shadow banking activity that had
become a large source of short-term funding demand prior to an
official crackdown on off-balance activities last year.
    Loose liquidity in the interbank market suggests there is no
need for the People's Bank of China (PBOC) to reduce banks'
reserve requirement ratio (RRR), at least during the second
quarter, let alone cut official interest rates, traders said.
    A string of weak first-quarter economic data has led many
economists to predict Beijing will loosen monetary policy to
keep growth on track, specifically by cutting the RRR, but
dealers in China's money market aren't betting on it yet. 
 
    "I would say the market is really flooded with money for
now. Banks find that if they offer even slightly elevated rates,
it becomes quite difficult to lend," said a dealer at a major
Chinese state-owned bank in Shanghai.
    "Perhaps the central bank does not want to tighten liquidity
conditions, but it also does not need to inject large amounts of
fresh money into the markets to fan supply."
    The weighted average of the benchmark seven-day bond
repurchase agreement rate stood at 2.76 percent at
midday on Friday, tumbling nearly a full percentage point from
last week's close.
    The overnight repo rate dropped 73 basis
points to 2 percent, while the 14-day repo 
tumbled 97 basis points to 2.72 percent.
     
    TOO MUCH OF A GOOD THING
    A typical RRR cut by the PBOC is usually 50 basis points,
and a single cut, based on China's total bank savings at
present, would thus pump about 550 billion yuan ($89 billion) of
base money into China's monetary base.
    If one applies a usual four-time money multiplier effect in
China to that injection, it would add 2.2 trillion yuan in fresh
cash in circulation in the banking system.
    But enduring weak demand within China, together with the
huge 116 trillion yuan M2 money supply already outstanding,
means that a further injection would likely push funds into
sectors that the government does not want to support.
    These include industries struggling with overcapacity such
as steel and cement, as well as the frothy property market.
    "Companies complaining they are short of money are either
cash-intensive companies, such as property firms, or those which
rely on borrowing new money to roll over old debt," the
Financial News, a newspaper run by the PBOC, said in a
commentary in late March.
    "If the PBOC releases money via an RRR cut now, liquidity
will flow to such companies. As a result, property prices will
continue rising and overcapacity in sunset sectors will worsen."
    Traders also noted that similar predictions about RRR cuts
circulated in the markets in 2013 after an uninspiring first
quarter, but those never materialised. Instead, the PBOC
dramatically tightened money in June.
    "Banks appear to have conducted some self-censorship not to
be too aggressive in off-balance sheet business since last
year's clampdown," said a trader at an Asian bank in Shanghai.
    "That has reduced their short-term liquidity demand in the
interbank market, a change that will have an enduring effect to
improve liquidity conditions in the money markets."
    Market rates also reflect no expectation of a rate cut. 
    Two-year interest rate swaps, a key gauge of
official rate expectations, stood at 2.92 percent at midday on
Friday, or 7.55 basis points below the official one-year yuan
deposit rate of 3 percent.
    
 SHORT TERM RATES: 
 Instrument        RIC             Rate*    Change (weekly,
                                            bps)**
 1-day repo                           2.00                -73
 7-day repo                           2.76                -99
 14-day repo                          2.72                -97
 7-day SHIBOR                         2.76                -94
 *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                  2.9245           -7.55
 year benchmark                               
 5 yr 7-day repo swap                   4.22            +122
 1 yr 7-day repo swap                   3.73             +73
 *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                   92.72           +0.38
 Sep 2014 5 yr                   93.14           +0.38
 Dec 2014 5 yr                   93.22           +0.26
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    MARKET DRIVERS
    - China money dealers see stability, not easing going
forward 
    - 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
  
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($1 = 6.22 Chinese yuan)

 (Editing by Jacqueline Wong)
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