* PBOC injects cash to meet heavy demand ahead of Lunar New
* But traders fret over 450 bln yuan post-holiday fund drain
* C.bank seen guiding money rates higher over medium term
* Limited impact seen from Federal Reserve's QE tapering
By Gabriel Wildau
SHANGHAI, Jan 30 China's money rates dropped
this week as a large fund injection by the central bank helped
to offset the traditional spike in cash demand ahead of the
Chinese Lunar New Year holiday that begins on Friday.
The People's Bank of China (PBOC) injected a net 75 billion
yuan ($12.4 billion) into the banking system through open market
operations on Tuesday, adding to the net 375 billion yuan
injection last week.
The injections of short-term funds were intended to help
banks meet elevated demand from households and firms to pay for
holiday gift-giving, celebrations and bonuses.
"Today, there are loans available at every maturity, and
actually it's not so easy to find borrowers. Some people who
don't normally call me got in touch today to ask if I want
cash," said a trader at a securities brokerage in east China.
The 14-day repo rate, which was heavily
traded this week because its maturity extends across the holiday
period, soared to 7.03 percent on Wednesday but plunged to
around 5.65 percent by midday on Thursday, down from 6.94
percent at Friday's close.
The market's focus has now shifted to how the central bank
will handle the 450 billion yuan fund withdrawal that will occur
after the holiday as the 14- and 21-day reverse repos issued in
recent weeks mature.
"Regarding post-holiday liquidity, we think it's going to be
a neutral tone with a tightening bias. But particularly that
first week back when a lot of reverse repos will mature, the
central bank will probably do some more reverse repo (fund
injections)," said the brokerage trader.
Traders don't expect a dramatic impact on Chinese interest
rates from the U.S. Federal Reserve's decision to further reduce
taper its bond buying program, known as quantitative easing
(QE), by $10 billion per month.
"It's hard to say what the impact of QE (tapering) will be.
The main issue after the holiday will be open market operations
and how many (reverse repos) get rolled over. I think they'll
definitely roll over a bit," said a trader at a large
state-owned bank in Beijing."
Market sentiment also received a boost this week when a
high-yielding investment trust product, which was perched on the
edge of default, announced that it would repay investors ahead
of the product's Jan. 31 maturity date.
Market watchers said that default would have marked a
landmark precedent, shattering the widespread perception of
implicit guarantees on high-yielding investment products in
China's shadow banking sector. That could have sent money-market
rates sharply higher on fears of counterparty risk.
Still, interbank lending rates remained high by normal
standards, with the benchmark seven-day bond repurchase rate
trading at 4.99 percent on a weighted-average
basis near midday on Friday. That compares to an average of 4.13
percent in 2013.
The pre-holiday spike in rates this year was also more
severe than the comparable period in 2013. The seven-day rate
averaged 3.59 percent in the week before the Lunar New Year
holiday last year, compared to 5.02 percent this year.
That contrast reflects a broader policy shift by the central
bank in recent months towards tighter money.
The People's Bank of China is using higher interbank
interest rates as a tool to control credit growth, especially
growth in off-balance-sheet credit that banks often fund with
China's interbank money market will be closed from Jan. 31
to Feb. 6 for the Chinese Lunar New Year holiday. The market
will reopen on Feb. 7 and a weekend session on Feb. 8.
SHORT TERM RATES:
Instrument RIC Rate* Change Pct
1-day repo CN1DRP=CFXS 3.0195 6.33 -2.14%
7-day repo CN7DRP=CFXS 3.4879 1.34 -0.39%
7-day SHIBOR SHICNYSWD= 3.494 2.5 -0.72%
*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 vs
2-yr IRS based on 1- 3.03 +0.03
5-yr IRS based on 4.89 n/a
*This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise.
GOVERNMENT BOND FUTURES
Contract RIC Rate Change (weekly, bps)
Mar 2014 5-yr 92.29 +14.4
Jun 2014 5-yr 92.68 +6.8
Sep 2014 5-yr 92.93 +16.6
- China eases Jan credit squeeze with cash, surprising
- 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
- Fiscal deposits drive interbank liquidity trends GRAPHIC:
- 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 = 6.0553 Chinese yuan)
(Additoinal reporting by Kang Xize in BEIIJING; Editing by Kim