Chinese money rates fall, PBOC sends mixed messages

Fri Aug 1, 2014 2:17am EDT

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SHANGHAI, Aug 1 (Reuters) - Chinese money rates dropped in
volatile trading this week as the central bank sent mixed
messages by draining cash from the market while lowering the
rate on the repos in its open market operations, traders said.
    The benchmark weighted average of the seven-day bond
repurchase agreement stood at 3.89 percent by
midday, down 23 basis points from last week's close.
    The overnight repo rate was at 3.20 percent,
down 17 basis points, while another actively traded maturity,
the 14-day repo, slumped 64 basis points this
week to 4.27 percent.
    Traders said the seven-day repo rate had the potential to
fall further next week to about 3.5 percent, partly after the
central bank sent a signal to allow money market rates to drop.
    The People's Bank of China (PBOC) drained a net 11 billion
yuan ($1.78 billion) from the interbank market via its open
market operations this week -- the first time that the central
bank conducted a net weekly drain since early May. 
    But the PBOC lowered the interest rate it paid on 14-day
repurchase agreements it conducted on Thursday to 3.7 percent,
down from the previous 3.8 percent when it conducted the same
business last time in April.
    "The mild drain showed the PBOC didn't want to loosen
liquidity too much," said a trader at a Chinese commercial bank
in Shanghai.
    "But the lower interest rate on its repos indicated that the
central bank is acting in response to the pledge from the
government to lower financing costs for economic activity.
Overall, the mixed moves showed PBOC's intention to maintain a
balance of money supply and demand in the market."
    China will continue to implement prudent monetary policy and
maintain appropriate credit growth to help ease financing costs
for domestic firms, Premier Li Keqiang told a regular cabinet
meeting last week. 
    With China's economic growth stabilising, traders expected
the PBOC to keep its monetary policy relatively stable in the
near term, traders said. 
    
 SHORT TERM RATES: 
 Instrument         RIC             Rate*  Change (weekly,
                                           bps)**
 1-day repo                          3.20              -16.98
 7-day repo                          3.89              -22.83
 14-day repo                         4.27              -63.54
 7-day SHIBOR                        3.91               -17.4
 
*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                 4.2250           123
 1 yr 7-day repo swap                 3.7875            79
 
*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
                                       (pct)
 Sep 2014 5 yr                  93.28            0.11
 Dec 2014 5 yr                  93.66            0.08
 Mar 2015 5 yr                  94.10            0.23
 
        >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - China money rates fall, markets return to normal after
deadline passes 
    - China money rates rise moderately, creating market
confidence on liquidity 
    - China money rates rise on quarter-end demand, IPO
speculation [ID: nL4N0P00Q9]
    - China's money rates slip, offer no signs of monetary
policy change [ID: nL4N0OU0LH]
    - 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
liberalizing 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 = 6.1745 Chinese Yuan)

 (Reporting by the Shanghai Newsroom; Editing by Simon
Cameron-Moore)
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