China market rates drop as c.bank in more accommodative liquidity stance

Fri May 30, 2014 1:38am EDT

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* PBOC injects money into market for third straight week
    * Widespread forecasts of RRR cut in near term
    * But traders do not believe RRR cut is imminent
    * Most think PBOC will use short-term tools first

    By Lu Jianxin and Kazunori Takada
    SHANGHAI, May 30 (Reuters) - China's money market rates fell
this week and are down sharply for the month of May as the
central bank has signalled more accommodative liquidity by
injecting cash into the markets for the third week in a row.
    The weighted average of the benchmark seven-day bond
repurchase agreement rate stood at 3.25 percent at
midday on Friday, down 12 basis points from last week's close,
while another active contract, the 14-day repo 
dropped 50 basis points to 3.39 percent.
    For the month, the seven-day repo rate has slid 82 basis
points so far while the 14-day rate tumbled 84 basis points.
    The People's Bank of China (PBOC) injected a net 20 billion
yuan ($3.2 billion) this week through open market operations,
having pumped a combined net 184 billion yuan into the money
markets over the past three weeks. 
    Money market conditions have remained much looser this year
compared with the second part of last year, as the PBOC has
increasingly eased its grip on liquidity to support the slowing
economy, traders said.
    China's annual economic growth slowed to an 18-month low of
7.4 percent in the first quarter, raising the risk that the
government could miss its economic growth target - set at 7.5
percent in 2014 - for the first time in 15 years.
    Premier Li Keqiang said last week that pre-emptive policy
fine-tuning was needed to help resolve "financing strains for
the real economy" and maintain "reasonable growth" in money
supply and bank credit. 
    His comments have sparked widespread speculation among
investment bankers that China could cut banks' required reserve
ratios (RRR) as early as June, but the central bank has so far
not given any hints that it would do so. 
    Money dealers, however, do not believe an RRR cut is
imminent.
    "The PBOC has far from exhausted handy tools," said a senior
trader at a Chinese state-owned bank in Shanghai.
    "It will first resume reverse repos in open market
operations, supplemented by other similar tools such as
re-lending, re-discount and SLFs (short-term lending facilities)
before it will resort to RRR or rate cuts." 
    Traders see money market rates remaining at relatively low
levels next month -- the anniversary of the Chinese credit
squeeze that roiled global markets in June 2013.
    "Investors widely expect no repetition of last June's market
squeeze as liquidity conditions are solid this year while the
PBOC appears to be poised to come to the market's rescue in case
of shortage," said a dealer at an Asian bank in Shanghai.
    Last year, the central bank drained cash from the financial
system to suppress a rise in shadow banking activity, which
poses a risk to financial stability. Shadow banking activity has
since eased a lot, according to official statistics.
    China's fixed income markets have also seen a steep
downtrend this year, with the benchmark five-year interest rate
swap at 3.83 percent by midday on Friday, compared
with the recent peak of 5.3 percent hit on Jan. 6.
    More liquidity sensitive one-year IRS dropped
to 3.46 percent, from 5.24 percent touched on Jan. 2.
        
 SHORT TERM RATES: 
 Instrument        RIC             Rate*    Change (weekly,
                                            bps)**
 1-day repo                           2.58                 +5
 7-day repo                           3.25                -12
 14-day repo                          3.39                -50
 7-day SHIBOR                         3.23                -18
 *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                  2.8696             -13
 year benchmark                               
 5 yr 7-day repo swap                   3.83             +83
 1 yr 7-day repo swap                   3.46             +46
 *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
                                (Yuan)  (weekly)
 Jun 2014 5 yr                   93.92           +0.84
 Sep 2014 5 yr                   94.34           +0.71
 Dec 2014 5 yr                   94.73           +0.74
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>    
    MARKET DRIVERS
    - As cash crunch anniversary looms, traders guess at c.bank
policy direction 
    - 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 = 6.24 Chinese yuan)

 (Editing by Jacqueline Wong)
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