* Short-term rates at highest level since June credit crunch
* Banks decline to inject cash despite rising demand
* Economists debate whether structural tightening under way
* Benchmark average 7-day repo at nearly 5 pct
By Pete Sweeney
SHANGHAI, Oct 25 China's money rates shot up
this week to their highest levels since June's dramatic cash
crunch as regulators signalled they are considering mild
tightening to get rising property prices and inflation under
The most commonly traded bond repurchase contracts showed
spikes in quoted rates on Thursday and Friday after the central
bank abstained from injecting cash for the third consecutive
session, resulting in a net drain and alarming some traders.
For example, the overnight repo rate was
quoted at 7.5 percent at one point, its highest level since June
28. The benchmark seven-day repo hit 6.94 percent
on Thursday while the 14-day repo hit 6.6
percent the same day.
Volume-weighted average prices (VWAP) which reflect
transaction sizes were lower, ranging between 4.47 percent and
5.89 percent, but also at their highest point since June.
Traders said the spike trades were outlying quotes from a few
small overextended banks, but average rates also posted triple
digit basis-point rises, illustrating the change in sentiment.
"Today sentiment is pretty nervous, just like yesterday. I
think the high rates are mostly due to a psychological
reaction," said a dealer at a major state-owned bank in Beijing.
"One reason is the central bank stopping issuance of reverse
repos during open market operations (which inject cash). And
then there are the tax payments coming due."
Rates had previously been steadily declining since the
beginning of the month thanks to easy liquidity, which traders
attributed mostly to foreign capital inflows and central bank
interventions in the forex market.
Money rates, however, remained far below the stratospheric
levels during the June cash crunch, which set off a panic in
financial markets globally. The squeeze saw some intraday quotes
for short-term instruments coming in as high as 30 percent. The
seven-day repo VWAP rose to over 11 percent on June 20.
However, the present situation shares some similarities.
Once again, the People's Bank of China (PBOC) has held off
from fully satisfying cash demand to make month-end tax and
regulatory escrow payments, which has put upward pressure on
In fact, whereas in June the PBOC injected a small amount of
funds, this time the central bank has held off from injecting
any funds at all for the last three sessions, resulting in a net
drain of 58 billion yuan for the week.
The central bank has drained a net 157.5 billion yuan from
markets since Sept. 30.
Traders are keeping a close eye on what the bank does next
week, when maturing central bank bills will drain a net 6
billion ($986.27 million) yuan, a relatively small amount.
TIGHTENING OR NOT?
Economists are divided on the significance of this week's
phenomenon, with some arguing that it marks a first step toward
making cash more expensive over the long term, following years
of easy money in the aftermath of the global financial crisis.
"We do not believe that the current rise in the repo rate is
being driven by seasonal factors such as the corporate tax
payment season," wrote Zhang Zhiwei, economist with Nomura, in a
"The Chinese government is well aware of such seasonal
factors and could have adjusted its liquidity management
accordingly to offset such factors and avoid rise of the repo
rate, yet it has allowed repo rates to rise, which we take as a
clear policy signal."
However, others argued this was merely a seasonal tweak and
that conditions would quickly return to normal. Steve Wang and
David Goldman of Reorient Financial Markets Ltd pointed out that
so far the net basis point rise in the seven-day repo rate was
roughly in line with month-end rises in previous months this
However, neither traders nor economists who spoke to Reuters
predicted a return to the extraordinarily tight conditions in
June, which saw domestic media reporting ATMs running out of
cash as banks ran dry.
The market is also debating how liquidity will be tightened.
Regulators have said they are going to make adjustments to get
credit growth and inflation under control, but few expect a
massive structural adjustment like an increase to reserve
requirement ratios (RRR) at banks, which would withdraw base
money supply from the economy for a long period of time.
This could mean that the central bank will continue to rely
on a combination of short-term interventions in the interbank
market, but perhaps shift back to issuing short-term forward
repos, which drain cash for short periods from a seven to 91
Alternatively, some economists believe Beijing has room to
implement a mild rise in interest rates, given some signs of
economic recovery, in particular after a strong manufacturing
survey released on Thursday.
SHORT TERM RATES:
Instrument RIC Rate* Change (weekly,
1-day repo CN1DRP=CFXS 4.47 121.78
7-day repo CN7DRP=CFXS 4.98 129.49
14-day repo CN14DRP=CFXS 5.89 131.87
7-day SHIBOR SHICNYSWD= 4.68 119.5
*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 year CNABAD2YF= 2.9192 8
5 yr 7-day repo swap CNYQB7R5Y= 4.17 -117
1 yr 7-day repo swap CNYQB7R1Y= 4.17 -117
*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 Rate Change
Dec 2013 5 yr CTFZ3 93.78 -18.79
Mar 2014 5 yr CTFH4 93.91 -13.40
Jun 2014 5 yr CTFM4 94.03 -8.98
- Govt bond futures market to start with a whimper, not a
- In wake of cash crunch, PBOC commits to transparency but
quietly tightens grip
- CHINA MONEY-Tighter interbank regulation seen after cash
- Collapse in China bond volumes exposes market's seamy side
- External liquidity tracker: Rise in fiscal deposits slams
liquidity in July link.reuters.com/pem75t
- Impact of maturing central bank bills and repos GRAPHIC: link.reuters.com/pem75t
- Chinese government bond curve steepens as growth fears
ease GRAPHIC: link.reuters.com/jyr95t
- China's interest-rate swap curve steepens as growth
prospects improve GRAPHIC: link.reuters.com/ryr95t
- China corporate bond spreads narrowed on improving growth
outlook GRAPHIC: link.reuters.com/bas95t
- Hot money tracker: Hot money outflows reached record high
in July GRAPHIC: link.reuters.com/saz74t
(Additional reporting by Chen Yixin; Editing by Jacqueline