July 2, 2013 / 4:26 AM / 4 years ago

China's money rates tumble as c.bank lets cash flow in

* PBOC refrains from draining funds via operations
    * Lets 36 bln yuan flow into mkt via maturing bills, repos
    * Raises rediscount quota by 12 bln yuan
    * 7-day repo rate to head for normal 3-4 pct by mid-July

    By Lu Jianxin and Kazunori Takada
    SHANGHAI, July 2 (Reuters) - China's inter-bank funding
costs fell further on Tuesday as the central bank refrained from
draining funds via its regular open market operations, and
traders predicted rates would soon return to levels seen before
the recent cash crunch that roiled global markets.
    The People's Bank of China (PBOC) allowed 36 billion yuan
($5.9 billion) to flow into the banking system through its bills
and forward bond repurchase agreements maturing on Tuesday,
providing further liquidity to the market that had seen
short-term borrowing rates soar to record high levels last
    "On top of regulators' conciliatory attitude, the end of the
second quarter has removed the biggest seasonal demand for cash
in the inter-bank market," said a dealer at a major Chinese
commercial bank in Shanghai.
    "Money market rates appear to set to return to normal
conditions by around mid-July." 
    The benchmark weighted-average seven-day bond repurchase
rate slumped 69 basis points (bps) to 4.76
percent, its lowest since June 20, the peak of the liquidity
squeeze. It had traded in a 3-4 percent range earlier in the
    The overnight repo rate tumbled 63 bps to 3.79
percent, while the 14-day rate plunged nearly 100
bps to 5.09 percent.
    China's central bank allowed short-term borrowing costs to
spike to close to 30 percent on June 20, sending a blunt but
effective message to overstretched banks that it was determined
to bring risky lending under control.
    Policymakers later issued a flurry of reassurances that
there is ample liquidity in the financial system, but markets
remain concerned that attempts to curb credit growth would add
further strains on the already slowing economy. Banking shares
fell in Shanghai  on Tuesday. 
    The PBOC also said on Monday that it had increased the quota
on its rediscount window that bank branches can use to support
lending to small businesses and the agriculture sector by 12
billion yuan. 
    Traders said the increased amount was negligible but the
move helped support market confidence as it was taken as a
gesture that regulators are moving to solve the latest market
    The market has been hit by heavy demand for funds last
month, including those from banks who need more cash to meet
regulatory checks and window-dress their books for the
    While the central bank has started to offer liquidity to
banks, regulators have sent a very clear signal that it would
proceed with its plan to clean up the yuan lending market and
ensure funds make their way into the real economy, traders said.
    In a sign that market liquidity has already improved, a
one-year fixed-rate bond by the China Development Bank, a policy
bank, was auctioned on Tuesday at a yield of 3.91 percent, much
lower than 4.09 percent expected by the market.
                                 Current  Prev close  Change
                                           (pct)      (bps)  
7-day repo         4.7613   5.4498     -68.85   
7-day SHIBOR        5.4230   4.7500     -67.30
Note: Repo rate is weighted average.

    - China opens new front in war as yuan speculation distorts
export data 
    - China seeks to curb speculative flows without monetary
    - Markets spin on liquidity switches 
    - Non-bank financing to rise in 2013 
    - External liquidity tracker: Collapse in FX purchases 
hurts liquidity in May link.reuters.com/pem75t
    - Impact of maturing central bank bills and repos GRAPHIC: link.reuters.com/pem75t
    - Chinese government bond curve flattens on liquidity
squeeze, growth concerns GRAPHIC: link.reuters.com/jyr95t
    - China's interest-rate swap curve is inverted on severe
liquidity squeeze GRAPHIC: link.reuters.com/ryr95t
    - China corporate bond spreads have narrowed slightly 
GRAPHIC: link.reuters.com/bas95t
    - Hot money tracker: Hot money inflows have returned in
2013, boosting liquidity GRAPHIC: link.reuters.com/saz74t

 (Editing by Kim Coghill)

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