China money rates ease sharply after weak inflation, housing data

Fri May 9, 2014 4:40am EDT

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By Pete Sweeney
    SHANGHAI, May 9 (Reuters) - China's money rates slid this
week despite a cash drain by the central bank, with the
benchmark interest rate swap curve sinking in May on
accomodative liquidity and weaker-than-expected inflation data.
    China's consumer price inflation came in at 1.8
percent in April, surprising analysts. China's economy grew at
its slowest pace in 18 months in the first quarter, and a
Reuters poll shows analysts expect growth of 7.3 percent in
2014, the weakest in 24 years.
    Exports showed signs of recovery in April, but yearly
comparisons are difficult giving the distorting base effects of
heavy currency speculation in 2013, which threw off export
figures. Against this investors are weighing signs that China's
property market is cooling more radically than originally
expected.  
    The unexpected weakeness of China's economy has some
economists calling for a deeper liquidity injection through
reducing banks' reserve requirement ratios, but so far there are
few signs of major stress on short-term rates.
    The weighted average of the benchmark seven-day bond
repurchase agreement had lost over 90 basis points (bps) from
the previous week's close to stand at 3.17 percent shortly
before the market close.
    Other major traded rates also slid, remaining near or below
3 percent, the range traders generally consider accomodative.
    Frances Cheung, strategist at Credit Agricole CIB in Hong
Kong, wrote in a research note on Thursday that the relatively
mild drains executed by the central bank during regular open
market operations, combined with a symbolic cut to the RRR for
rural banks, have reduced concerns that the PBOC would soon
return to raising rates to apply pressure to the shadow banking
system, as it was perceived doing for much of 2013.
    "Although the PBoC emphasised that these selective RRR cuts
were structural - not cyclical - in nature, the market took
these policy actions as a sign that the PBoC was at least not as
hawkish as previously thought," she wrote.
    Language in the recent quarterly monetary support referring
to the role of financial markets in stabilising growth
reinforced this few, she added.
    "The PBoC is seen as becoming marginally less hawkish/more
dovish." 
    The IRS curve for the seven-day repo has
flattened and declined so far in May, following a trend
established in April.
        
SHORT TERM RATES: 
 Instrument      RIC                  Rate*    Change (weekly,
                                               bps)**
 1-day repo                              2.21           -26.54
 7-day repo                              3.17           -90.16
 14-day repo                             3.08           -114.8
 7-day SHIBOR                            3.19              -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                   2.9704             -3
 year benchmark *                              
 5 yr 7-day repo swap                  3.8500             85
 1 yr 7-day repo swap                  3.6200             62
 
*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    Weekly change
 Jun 2014 5 yr                92.94            27.47
 Sep 2014 5 yr                93.29            25.82
 Dec 2014 5 yr                93.47            26.99
      
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    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
 
    - China corporate financing squeezed as reform plans spark
rate spike 
    
    DATA POINTS
    - Chinese government bond curve rises moderately in April
from low base GRAPHIC: link.reuters.com/jyr95t
    - China's interest-rate swap tumbles in April on flush
liquidity GRAPHIC: link.reuters.com/ryr95t
    - China corp bond spreads widen on risk aversion GRAPHIC: link.reuters.com/bas95t
    - China hot money tracker: China hot money flows moderate in
early 2014 GRAPHIC: link.reuters.com/saz74t
    - China interbank liquidity tracker: Physical currency (MO)
drives liquidity swings in December and January GRAPHIC: link.reuters.com/nem75t
    
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 (Editing by Kim Coghill)
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