China's money rates spike this week, but injection eases pressure

SHANGHAI, Dec 16 (Reuters) - Money rates in China surged as
interbank liquidity became increasingly tight over the course of
the week, but the pressure eased slightly on Friday after the
central bank injected cash via medium-term lending facilities,
traders said.
    The volume-weighted average rate of the benchmark seven-day
repo traded in the interbank market, considered
the best indicator of general liquidity in China, was 2.6335
percent, 25.42 basis points higher than the previous week's
closing average rate. 
    The seven-day Shanghai Interbank Offered Rate (SHIBOR) rose
to 2.5190 percent, 2.62 basis points higher than the previous
week's close. The overnight rate surged to the highest level in
19 months on Friday.
    Market liquidity had been broadly balanced at the start of
the week, with pressure only on the long end due to seasonal
    But rates for all tenors rose after China's benchmark
10-year treasury futures tumbled the maximum allowed 2 percent
on Thursday after the U.S. Federal Reserve hiked interest rates
and signaled more increases in 2017 than many had expected.
    To cushion a liquidity shortfall, the People's Bank of China
lent 394 billion yuan ($56.72 billion) to 19 financial
institutions via its medium-term lending facility (MLF) on
    The central bank lent 339 billion yuan a week earlier,
putting the total MLF injections at 733 billion yuan so far this
month. Only 11.5 billion yuan of loans matured this month,
according to Reuters calculations based on central bank data.
    The PBOC uses the MLF and the standing lending facility as
tools for managing short- and medium-term liquidity in the
banking system.
    Traders said the MLF loans stabilised liquidity conditions.
    "The market was in panic after plunges in the treasury
futures and other rumors, but it stabilised soon after central
bank support through MLF loans," said a trader at a Chinese bank
in Shanghai. 
    In addition, the central bank injected 250 billion yuan to
the market through its open market operations this week,
compared with a net drain of 535 billion yuan a week earlier.
    China's central bank urged major commercial banks to lend to
non-bank financial institutions on Thursday afternoon after many
suspended interbank operations due to tight liquidity
conditions, Caixin reported on late on Thursday. 
    Ding Shuang, Chief China Economist at Standard Chartered in
Hong Kong, said the central bank's verbal intervention did not
mean there was a systemic liquidity problem.
    "It simply suggests that the central bank sees overall
liquidity as adequate, but the distribution of liquidity appears
to be concentrated in the bigger banks. There seems to be a
hoarding of liquidity by the big banks," he said.
    Some traders agreed, saying liquidity was not extremely
tight but rates skyrocketed as big banks held cash.
    Banks preparing for year-end macro prudeential assessments
was one factor. Companies and households also tend to shore up
their liquidity positions at the end of the year.
    Yields on 10-year Chinese treasury bonds 
came down 0.68 percentage points from the market open to 3.32
percent. The rate was four basis points lower than the previous
    The price of Chinese 10-year treasury futures for March
delivery rebounded on Friday, rising more than one
percent. They hit their daily downside limit of two percent for
the first time ever at one point on Thursday.
    The spread of the five-year credit default swap rate on
Chinese sovereign debt rose 3.89 percent at

 Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.2810      2.3268      -4.58                      0.00 Seven-day        2.6335      2.5433      +9.02                      0.00 14-day           3.6220      3.3175      +30.45                     0.00 Shanghai stock exchange repo market
 Overnight        5.3000      2.6900      +261.00                    275,159.7
 Seven-day<CN7DR  4.7500      3.4950      +125.50                    40,753.80
 14-day           5.0500      3.9000      +115.00                    7,186.90 PBOC Guidance Rates
 Overnight        2.3000      2.2800      +2.00                      
 Seven-day        3.2400      2.5000      +74.00                     
 14-day           3.6000      3.5000      +10.00                     
 Overnight        2.3300      2.3110      +1.90                      
 Seven-day        2.5190      2.5050      +1.40                      
 Three-month      3.1774      3.1635      +1.39                      
 Instrument            RIC         Rate          Spread vs 1 yr
                                                 official deposit
 2 yr IRS based on 1   CNABAD2YF=        0.0000              -1.5
 year benchmark                                  
 5 yr 7-day repo swap  CNYQB7R5Y=        3.7900               n/a
*This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise
China FX and money market guide: 
 China debt market guide: 
 SHIBOR rates: 
 Reports on central bank open market operations: 
 New Chinese debt issues: 
 Prices for central bank bills, treasury bonds and sovereign
 Overview of China financial market data: 

($1 = 6.9465 Chinese yuan renminbi)

 (Reporting by Winni Zhou and John Ruwitch; Editig by Simon