* PBOC seen allowing relatively easy in short-term
* Weak manufacturing data also supports easier money
* But Jan credit data suggests return to excess debt growth
* PBOC likely to tighten liquidity again after mid-March
By Lu Jianxin and Gabriel Wildau
SHANGHAI, Feb 21 China's key money rates slumped
to four-month lows this week, and traders said the government
may be loosening liquidity to boost sentiment ahead of an annual
parliament session in early March.
Market talk also focused on a weak manufacturing survey
released this week, which may push the People's Bank of China
(PBOC) to relax a clampdown on excessive credit growth that it
launched in mid-2013.
The PBOC resumed its use of cash-draining bond repurchase
agreements in open market operations this week, its first use of
this tool in eight months. But authorities only drained a modest
108 billion yuan ($18 billion) via that route.
Traders say the resumption of cash-draining repos is
preparation in case the PBOC needs to mop up a larger volume of
excess liquidity in the coming weeks.
The benchmark seven-day bond repurchase rate
tumbled 99 basis points (bps) from the end of last week to 3.37
percent on a weighted-average basis at midday on Friday. If it
holds, this level would be the lowest close since mid-October.
The 14-day repo rate slumped 55 bps to 4
percent, while the overnight repo rate was down
141 bps at 1.74 percent, which would be the lowest close since
China's legislators will gather in Beijing in early March to
map out economic polices for the next year and approve personnel
changes in the government, among other tasks.
"China traditionally tries to create a positive atmosphere
ahead of and during any major political events, and that has
given rise to speculation of a more accommodative liquidity
policy in coming weeks," said a dealer at an Asian bank in
Chinese factory activity shrank for a second straight month
in February, with employment falling at the fastest pace in five
years, according to the flash Markit/HSBC Purchasing Managers'
Index (PMI) published on Thursday.
The central bank also said last weekend that Chinese banks
disbursed 1.32 trillion yuan in new loans in January, the
largest amount lent in a single month in four years, far
exceeding expectations for 1.1 trillion yuan.
Seasonality is always an issue at the start of the year,
both because banks tend to front-load their lending and because
of distortions resulting from the Lunar New Year holiday.
Even so, traders said the all-time high fund-raising figures
were particularly unsettling.
Total social financing (TSF), a broad measure of liquidity
and credit in the economy, hit a record monthly high of 2.58
trillion yuan in January, toppling the previous record of 2.55
trillion yuan in March 2013.
The TSF also showed a revival of shadow banking business in
January, as entrusted loans doubled.
"January credit data appears to have sent another warning
that increased money supply has not flowed into the real
economy," said the trader.
"As such, the PBOC could return to stern liquidity policy at
any time, although most likely after March."
Successive record high TSF readings in the first quarter of
last year -- driven largely by explosive growth in shadow
banking activity -- prompted the PBOC to strike back through the
interbank market, engineering repeated cash crunches that saw
short-term rates reach as high as 30 percent in late June.
Despite this week's ease in short-term rates, many traders
still predict the seven-day repo rate's 250-day moving average
will rise by a further 50 bps to 4.5 percent in the first half
of the year, up from around 4.0 percent in late 2013 and 3.5
percent in mid-2013.
SHORT TERM RATES:
Instrument RIC Rate* Change (weekly,
1-day repo 1.74 -141
7-day repo 3.37 -99
14-day repo 4.00 -55
7-day SHIBOR 3.60 -84
*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 2.9559 -4.41
5 yr 7-day repo swap 4.85 +185
1 yr 7-day repo swap 4.65 +165
*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 Change
Mar 2014 5 yr 91.892 -0.71
Jun 2014 5 yr 92.496 -0.52
Sep 2014 5 yr 92.806 -0.43
- Tax man attack on shadow banking startles markets
- 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 = 6.09 Chinese yuan)
(Editing by Kim Coghill)