SHANGHAI, Aug 1 Chinese money rates dropped in
volatile trading this week as the central bank sent mixed
messages by draining cash from the market while lowering the
rate on the repos in its open market operations, traders said.
The benchmark weighted average of the seven-day bond
repurchase agreement stood at 3.89 percent by
midday, down 23 basis points from last week's close.
The overnight repo rate was at 3.20 percent,
down 17 basis points, while another actively traded maturity,
the 14-day repo, slumped 64 basis points this
week to 4.27 percent.
Traders said the seven-day repo rate had the potential to
fall further next week to about 3.5 percent, partly after the
central bank sent a signal to allow money market rates to drop.
The People's Bank of China (PBOC) drained a net 11 billion
yuan ($1.78 billion) from the interbank market via its open
market operations this week -- the first time that the central
bank conducted a net weekly drain since early May.
But the PBOC lowered the interest rate it paid on 14-day
repurchase agreements it conducted on Thursday to 3.7 percent,
down from the previous 3.8 percent when it conducted the same
business last time in April.
"The mild drain showed the PBOC didn't want to loosen
liquidity too much," said a trader at a Chinese commercial bank
"But the lower interest rate on its repos indicated that the
central bank is acting in response to the pledge from the
government to lower financing costs for economic activity.
Overall, the mixed moves showed PBOC's intention to maintain a
balance of money supply and demand in the market."
China will continue to implement prudent monetary policy and
maintain appropriate credit growth to help ease financing costs
for domestic firms, Premier Li Keqiang told a regular cabinet
meeting last week.
With China's economic growth stabilising, traders expected
the PBOC to keep its monetary policy relatively stable in the
near term, traders said.
SHORT TERM RATES:
Instrument RIC Rate* Change (weekly,
1-day repo 3.20 -16.98
7-day repo 3.89 -22.83
14-day repo 4.27 -63.54
7-day SHIBOR 3.91 -17.4
*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 2.9704 -3
year benchmark *
5 yr 7-day repo swap 4.2250 123
1 yr 7-day repo swap 3.7875 79
*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 Weekly change
Sep 2014 5 yr 93.28 0.11
Dec 2014 5 yr 93.66 0.08
Mar 2015 5 yr 94.10 0.23
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($1 = 6.1745 Chinese Yuan)
(Reporting by the Shanghai Newsroom; Editing by Simon