China's money rates rise on tax payments, end-month demand; upside limited

Fri Apr 25, 2014 1:38am EDT

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* Rates still at comfortable levels on ample liquidity
    * PBOC's open market operations withdraw only moderate cash
    * Efforts to boost economy soften PBOC stance this year
    * Banks cut risky business after clampdown last year

    By Lu Jianxin and Gabriel Wildau
    SHANGHAI, April 25 (Reuters) - China's short-term funding
costs rose this week amid a seasonal surge in annual corporate
tax payments as well as month-end factors that traditionally
boost cash demand.
    But money market rates remained at comfortable levels, with
cash relatively easy to borrow, and traders see little room for
rates to drop sharply in coming weeks.
    Chinese money market conditions have remained much looser
this year compared with in the second part of last year, as the
People's Bank of China has withdrawn only moderate amounts of
cash through mild open market operations, as it aims to support
the sagging economy.
    The central bank has also been willing to keep conditions
looser because banks appear to have reduced shadow banking
activity, which had become a large source of short-term funding
demand prior to an official crackdown on off-balance activities
last year.
    The weighted average of the benchmark seven-day bond
repurchase agreement rate stood at 3.51 percent at
midday on Friday, 69 basis points higher than last week's close.
    The overnight repo rate rose 33 basis points
to 2.32 percent, while the 14-day repo jumped 164
basis points to 4.37 percent.
    The second half of April is typically a peak time for
Chinese firms to pay corporate income tax for the previous year.
Such payments drain interbank liquidity as commercial bank
deposits flow into the central bank as fiscal deposits.
    Month-end factors also pushed rates up this week. Banks need
more funds to meet regulatory requirements such as
loan-to-deposit ratios near the end of the month.
    "The current money market rates are reasonable considering
tax payments and end-month demand," said a trader at a Chinese
commercial bank in Shanghai.
    "Judging from the PBOC's softer liquidity position this year
compared with last year, money rates are likely to remain at
relatively low levels in the coming weeks."
    
    WEAK ECONOMY
    The PBOC mopped up only a net 2 billion yuan ($320 million)
from the markets this week through open market operations, down
from a net drain of 41 billion yuan last week, continuing its
relatively dovish stance this year. 
    This position is in line with government efforts to fine
tune policies this year to boost the world's second-largest
economy as China's first-quarter gross domestic product (GDP)
hit an 18-month low.
   
    Last year, the central bank was actively draining cash from
the financial system to suppress a surge in shadow banking and
other off-balance business by banks, which appeared to threaten
the stability of the system. That caused two market squeezes in
June and December, which roiled global markets.
    But in a sign that shadow bank activity is slowing down,
trust assets under management grew only 7.5 percent
quarter-on-quarter in the first three months of 2014, down from
an average of 11.8 percent from 2010 to 2013. 
    Reflecting the ample money supply, an auction by the
Ministry of Finance of 20-year bonds in the interbank market on
Friday was priced at an average yield of 4.77 percent, near the
lowest end of market forecasts of a range of 4.76 to 5.00
percent. 
    China's fixed income markets have also see a steep downtrend
this year, with the benchmark five-year interest rate swaps
 lingering around six-month lows at 4.29 percent at
midday on Friday, compared with the recent peak of 5.3 percent
hit on Jan. 6.
    More liquidity sensitive one-year IRS dropped
to 3.81 percent, from 5.24 percent touched on Jan. 2.
    
 SHORT TERM RATES: 
 Instrument        RIC             Rate*    Change (weekly,
                                            bps)**
 1-day repo                           2.32                +33
 7-day repo                           3.51                +69
 14-day repo                          4.37               +164
 7-day SHIBOR                         3.50                +74
 *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                  2.9384           -6.16
 year benchmark                               
 5 yr 7-day repo swap                   3.81             +81
 1 yr 7-day repo swap                   4.26            +126
 *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                   92.53           -0.25
 Sep 2014 5 yr                   92.95           -0.20
 Dec 2014 5 yr                   93.16           -0.14
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>    
    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
  
     >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   
($1 = 6.22 Chinese yuan)

 (Editing by Chris Gallagher)
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