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Chinese money rates plunge on week, helping push up stock market
September 5, 2014 / 6:31 AM / 3 years ago

Chinese money rates plunge on week, helping push up stock market

* Benchmark 7-day repo rate slumps 48 bps so far this week
    * Main stock index jumps 4.4 pct, set for best week in a
year
    * Eurozone easing surprise has no impact on Chinese markets
    * Chinese c.bank seen keeping monetary policy neutral

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, Sept 5 (Reuters) - Chinese money market rates fell
sharply this week as the heavy demand for funds seen last week,
in part linked to a slew of initial public offerings (IPO),
faded, traders said.
    The abundance of liquidity in the money markets helped push
up China's stock market, which is set to have its best week in a
year.
    A surprise interest rate cut by the European Central Bank
and its outline of a new scheme to push money into the flagging
euro zone economy did not have much of an impact, partly because
China's capital account controls slow cash flowing in from
outside the country, traders said. 
    The weighted average rate for the benchmark seven-day bond
repurchase agreement stood at 3.19 percent at
midday on Friday, a big drop of 48 basis points from last week's
close.
    The overnight repo rate was at 2.81 percent, 
losing 11 basis points, while the 14-day repo,
another actively traded maturity, plunged 85 basis points on the
week to 3.41 percent.
    "Overall market liquidity is good," said a trader at a
Chinese commercial bank in Shanghai. "That means money rates
will remain at relatively low levels in the next couple of weeks
until the emergence of fresh seasonal demand late in September."
    Last week, eight firms opened IPO subscriptions, which
locked up nearly 800 billion ($130 billion) of funds until early
this week. Month-end factors also put pressure on cash demand as
Chinese banks needed more funds to meet regulatory requirements
such as loan-to-deposit ratios at the end of August.
    Helped by cash flowing back into the Chinese markets, the
Shanghai Composite Index had jumped 4.4 percent this
week as of midday on Friday and was set for its best week since
September last year.
    The main stock index was also buoyed by investor optimism
over the prospects for economic and market reforms, including
the Shanghai-Hong Kong connect, which is expected to be launched
in October, allowing investors in the two cities to directly
trade in each other's markets for the first time.
    
    MONETARY POLICY TO STAY NEUTRAL
    The People's Bank of China (PBOC) has increased its 
liquidity supply this week, putting a net 7 billion yuan into
the money markets via open market operations, the fourth
straight week of net injections. 
    The central bank is trying to ensure sufficient liquidity in
the system as the world's second-largest economy has seen a soft
spell since July, suggesting more policy support is needed to
support growth in the near term.
    There is widespread speculation that the PBOC will have to
give up on attempts to reform the credit-intensive nature of the
financial system to salvage growth. The market, however, expects
it will hold the line on injecting cash or reducing lending
rates. 
    The rate swap for the one-year deposit rate was
at 2.83 percent, close to the current 3 percent interest rate
level. 
      
 SHORT TERM RATES: 
 Instrument      RIC               Rate*    Change (weekly,
                                            bps)**
 1-day repo                           2.81             -10.63
 7-day repo                           3.19             -48.11
 14-day repo                          3.41              85.28
 7-day SHIBOR                         3.19               48.2
 
*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                    2.8347              -17
 year benchmark *                               
 5 yr 7-day repo swap                     3.92               92
 1 yr 7-day repo swap                     3.54               54
 
*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                         92.95            -0.43
 Dec 2014 5 yr                         93.39            -0.37
 Mar 2015 5 yr                         93.80            -0.34
 
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - PBOC seen holding liquidity hard line despite soggy data
 
    - Commission rates for dim sum bond underwriting squeezed in
first half 
    - Lending relaxation to help stabilise market interest rates
 
    - Beijing crackdown on insider trading "rates" sparks
industry exodus 
    - As cash crunch anniversary looms, traders guess at c.bank
policy direction 
    - China money dealers see stability, not easing, going
forward 
    
    DATA POINTS
    - Fiscal deposits drive interbank liquidity trends GRAPHIC:
link.reuters.com/pem75t
    - 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
 
    - Total Social Financing as pct of GDP GRAPHIC bit.ly/1o3RoRq
    - China loans, shadow banking growth over time: GRAPHIC bit.ly/1lcgHpY
 
    
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>  

(1 US dollar = 6.1415 Chinese yuan)

 (Editing by Alan Raybould)

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