* Apparent fund injection eases severe liquidity strain
* Rumours of interbank loan defaults had riled market
* Some banks were desperate to borrow at any price - dealers
* Reduced forex inflows remove major source of liquidity
(Updates to close)
By Gabriel Wildau and Chen Yixin
SHANGHAI, June 7 Conditions eased in China's
money market on Friday afternoon, as traders said the central
bank may have stepped in to inject liquidity after a morning
session in which the rate for overnight loans shot as high as 15
Early Friday, rates skyrocketed from already-high levels the
previous day. Rumours that several mid-sized banks had defaulted
on interbank loans added an element of fear to an acute
liquidity shortage related to a coming national holiday and a
slowdown in capital inflows. The rumours couldn't be verified.
The benchmark weighted-average seven-day bond repurchase
rate closed at 6.85 percent on Friday, up from
5.32 percent on Thursday and the highest since January 2012,
just before that year's Spring Festival holiday.
Early on Friday, dealers said that virtually the entire
market was short of cash, with few or no banks willing to lend.
Rates remained elevated on Friday afternoon, but dealers
said a few large state-owned banks began offering loans,
providing much-needed funds to the market.
The weighted-average one-day repo rate closed
at 8.68 percent on Friday - the highest since October 2007 -
from 6.15 percent on Thursday. It's extremely unusual for the
one-day rate to move higher than the seven-day rate.
Dealers said the central bank had likely conducted
short-term repos with selected banks, who were then able to
transmit funds to the rest of the market.
Chinese interbank lending rates often rise sharply in the
days before national holidays. Mainland markets will be closed
from Monday through Wednesday for the Dragon Boat Festival.
But earlier this year, the People's Bank of China (PBOC)
launched short-term liquidity operations as a supplement to
twice-weekly bill and repo auctions, partly in an effort to
reduce volatility in the interbank market.
Dealers had expressed surprise in recent days that the
central bank had not employed this tool more aggressively in
response to the sharp spike in rates.
"The market has been very tight, (but) the central bank
continues to drain funds," said a dealer at a city commercial
bank in Shanghai, referring to the issuance of new central bank
bills and repos this week in open market operations.
Some speculated that the People's Bank of China may have
been trying to teach the banks a lesson, amid concerns that
loose credit conditions in the early months of the year have
fueled speculation but failed to spur growth in the real
With the market on Friday very tight, individual trades for
seven-day repos went as high as 15 percent.
"They have no guidance price today. In other words, if
there's cash available, they'll take it. So it seems like a bit
of price gouging," said the dealer, referring to banks' normal
practice of issuing guidance on the price at which their traders
are permitted to borrow money.
The PBOC injected 160 billion yuan ($26.07 billion) into the
interbank market on a net basis this week, but the injection was
the result of the maturity of previously-issued bills and repos.
The bank still withdrew some funds through new bills and repo
Late in Thursday's trading session, rumours of a default on
an interbank loan began to rattle the market. On Friday, the
market was abuzz with talk that one bank's failure to repay its
loan had spawned funding strains for several banks.
SLOWING CAPITAL INFLOWS
Apart from seasonal factors, a slowdown in capital inflows
is also likely responsible for the rise in rates.
Foreign exchange purchases by Chinese banks - which analysts
view as a rough proxy for capital inflows - surged in early
2013, reaching a record high in January and remaining elevated
over the next three months.
Forex purchases by the central bank, which are included in
the data, add to the base money supply, increasing interbank
But a front-page analysis in the official Shanghai
Securities Journal on Tuesday predicted that forex purchases had
fallen back markedly in May.
"We think the core cause of lower liquidity is related to
slowing FX inflows," Igor Arsenin, head of emerging Asia
interest rates strategy at Barclays in Singapore, wrote in a
note to clients on Friday.
A slowdown in base money creation via forex purchases could
explain why the relatively sizable fund injection via open
market operations this week failed to calm funding markets.
Current Prev close Change
7-day repo 6.8509 5.3205 +153.04
7-day SHIBOR 6.6570 5.1370 +152.00
Note: Repo rate is weighted average.
- China opens new front in war as yuan speculation distorts
- China seeks to curb speculative flows without monetary
- Markets spin on liquidity switches
- Non-bank financing to rise in 2013
- External liquidity tracker: FX purchases are main source
if liquidity injection in recent months GRAPHIC: r.reuters.com/das95t
- Impact of maturing central bank bills and repos GRAPHIC: r.reuters.com/kas95t
- Long-term Chinese govt bond yields slumped amid doubts on
growth GRAPHIC: r.reuters.com/jas95t
- China's interest-rate swap curve has flattened GRAPHIC: r.reuters.com/has95t
- China corporate bond spreads have narrowed slightly
- Hot money tracker: Hot money inflows have returned in
2013, boosting liquidity GRAPHIC: r.reuters.com/was95t
($1 = 6.1362 Chinese yuan)
(Editing by Richard Borsuk)