SHANGHAI, Aug 22 China's money rates were mostly
flat this week, but fiscal deposits and month-end factors
maintained pressure on money supply as traders awaited further
signals from the central bank after a slew of data pointed to
softness in the economy.
The weighted average of the benchmark seven-day bond
repurchase agreement stood at 3.37 percent by
midday on Friday, easing off 3 basis points from last week's
The overnight repo rate was at 2.84 percent,
down 6 basis points, while the 14-day repo rose
30 basis points for the week to 3.88 percent.
"Liquidity is tight despite money rates seeming to be
normal," said a trader at a state-owned commercial bank in
Shanghai, adding he thought that low opening quotes were guiding
rates down despite the tightness.
Traders say that unusually low opening quotes were likely
set by large state-owned banks under the guidance of the central
bank, which uses these quotes to manipulate market sentiment,
delivering the appearance of accommodative money conditions
without the substance of it.
Seasonal rises in fiscal deposits were the main factor that
tightened up cash supply this week, traders said.
Chinese companies and other institutions must deposit tax
payments into accounts at designated commercial banks in the
form of fiscal deposits. The commercial banks then hand these
deposits over to the PBOC to become part of the PBOC's monetary
A decline in fiscal deposits implies an injection into the
money supply, and a rise implies the opposite.
Month-end factors also put pressure on cash demand this
week, traders said, because Chinese banks typically need more
funds to meet regulatory requirements such as loan-to-deposit
ratios near the end of the month.
Traders forecast that conditions will be much tighter next
week, as a wave of initial public offerings (IPOs) will further
increase cash demand as prospective issue subscribers typically
borrow short term cash and escrow it awaiting approval to
Ten out of 11 Chinese companies will take IPO subscriptions
next Thursday and Friday, according to an announcement by the
Chinese Securities Regulatory Commission (CSRC) on Tuesday, with
the official Xinhua news service projecting that the IPOs could
lock up as much as to 900 billion yuan ($146.13 billion).
IMMEDIATE POLICY EASING UNSEEN
The HSBC/Markit Flash China Manufacturing Purchasing
Managers' Index (PMI) showed that growth in China's vast factory
sector slowed to a three-month low in August, heightening
concerns about increasing softness in the economy.
In the context of weak recent macroeconomic data, markets
expect the monetary authorities would step in to support
liquidity supply in the money markets via cuts in the reserve
requirement ratio (RRR) or even interest rates, or with milder
Earlier in the week, a researcher at a government think-tank
told Reuters in an interview that China ought to loosen monetary
policy further through "modest" cuts in bank lending rates and
However, traders said the central bank has so far not given
any hints that it would ease monetary policy immediately.
This week, the People's Bank of China (PBOC) continued a
mild injection of 11 billion yuan into money markets via its
open market operations, which traders said had tiny impact to
improve the conditions.
"The central bank has maintained this amount of injection
for two weeks, which makes me believe it is far from resorting
to RRR or rates cut," said a trader at a state-owned commercial
bank in Shanghai.
But she added reverse repos, together with re-lending and
PSL (pledged supplementary lending), might be used if necessary.
In China's fixed income markets, the two-year interest rate
swap based on the one-year deposit rate stood at
2.9192 percent, signalling markets do not widely expect an
interest rate cut.
SHORT TERM RATES:
Instrument RIC Rate* Change (weekly,
1-day repo 2.84 -5.62
7-day repo 3.37 -2.75
14-day repo 3.88 29.94
7-day SHIBOR 3.37 2.3
*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
2 yr IRS based on 1 2.9192 -8
year benchmark *
5 yr 7-day repo swap 3.9700 97
1 yr 7-day repo swap 3.7100 71
*The 2 yr IRS spread can be seen as a proxy for forward-looking
market expectations of an interest rate cut or rise.
5 YR GOVERNMENT BOND FUTURES:
Instrument RIC Price Weekly change (%)
Sep 2014 5 yr 93.15 0.14%
Dec 2014 5 yr 93.57 -0.00%
Mar 2015 5 yr 93.94 -0.09%
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- Fiscal deposits drive interbank liquidity trends GRAPHIC:
- 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 US dollar = 6.1588 yuan)
(Reporting By Shanghai Newsroom and Pete Sweeney; Editing by