Chinese money rates fall on good liquidity, shrug off PBOC drain

Fri Aug 8, 2014 1:44am EDT

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SHANGHAI, Aug 8 (Reuters) - Chinese money rates dropped this
week as liquidity conditions improved after the seasonal demand
at the end of month last week, helping offset a net drain from
the central bank via open market operations.
    The  weighted average of the benchmark seven-day bond
repurchase agreement stood at 3.47 percent by
midday on Friday, down 43 basis points from last week's close.
    The overnight repo rate was at 2.98 percent,
down 22 basis points, while the 14-day repo,
slumped 61 basis points this week to 3.65 percent.
    Chinese money markets typically see their rates rising late
in a month when banks need to mobilise additional funds to meet
regulatory requirements such as the loan-to-deposit ratio. Rates
also typically fall early in a new month.
    The People's Bank of China (PBOC) drained a net 20 billion
yuan ($3.25 billion) from money markets this week, the second
straight week that it mopped up cash. 
    "The central bank's slight drain of funds is a signal that
it wants to keep money supply stable," said a trader at a
Chinese commercial bank in Shanghai. "The market reaction was
muted because money is not in short supply."
    As Chinese economy shows signs of recovery of late, traders
said they expected the PBOC might be less generous in offering
cash to the money market for the rest of this year as compared
with the first half.
    As a result, traders said they expected money market rates 
would be unlikely to drop sharply.
    "The seven-day repo rate may move between 3.2 and 3.3
percent next week," the trader said.
    China's surprisingly buoyant exports in July pushed its
trade surplus to a record, although a drop in imports signals
sluggish domestic demand that will likely call for continuing
policy support to keep economic growth on track. 
    Exports in July jumped 14.5 percent from a year earlier, the
General Administration of Customs said on Friday, doubling from
7.2 percent in June and roundly beating market expectations.
    The PBOC increased the supply of liquidity to the money
market in the first half of this year as economic growth slowed
and the government sought measures to underpin growth.
    
 SHORT TERM RATES:   
 Instrument     RIC               Rate*    Change (weekly,
                                           bps)**
 1-day repo                          2.98           -21.85
 7-day repo                          3.47           -43.26
 14-day repo                         3.65           -61.38
 7-day SHIBOR                        3.46              -45
 
*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                     2.9329               -7
 on 1 year                                  
 benchmark *                                
 5 yr 7-day repo                    4.1017              110
 swap                                       
 1 yr 7-day repo                    3.7067               71
 swap                                       
 
*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
                                             (%)
 Sep 2014 5 yr                        93.18            0.07%
 Dec 2014 5 yr                        93.59            0.08%
 Mar 2015 5 yr                        93.91           -0.05%
 
        >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    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 = 6.1575 Chinese Yuan)

 (Reporting by the Shanghai Newsroom; Editing by Eric Meijer)
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