January 4, 2019 / 7:35 AM / 5 months ago

China's money rates drop; more targeted easing on the way

    SHANGHAI, Jan 4 (Reuters) - China's primary money rates fell
sharply in the first week of 2019 as a year-end surge in cash
demand abated and the central bank broadened the scope of
targeted reserve requirement cuts.
    Those factors helped to outweigh the biggest net drain of
liquidity by the People's Bank of China (PBOC) through its
regular open market operations since October, as 430 billion
yuan worth of reverse bond repurchase agreements issued before
the new year matured.
    The PBOC issued 110 billion in reverse repos this week, for
a net 320 billion yuan drain.
    On Friday afternoon, 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 2.3606 percent.
    That was 71.13 basis points lower than the previous week's
closing average rate of 3.0719 percent.
    The Shanghai Interbank Offered Rate (SHIBOR) for the same
tenor fell 15.8 basis points to 2.5630 percent, from the
previous week's close of 2.7210 percent.
    The one-day or overnight rate stood at 1.6325 percent and
the 14-day repo stood at 2.1057 percent.
    Chinese Premier Li Keqiang raised the prospect of even more
banking system liquidity Friday, saying that China will cut
banks' reserve requirement ratios (RRRs), taxes and fees, with
an eye on supporting small and private companies.
    The statement comes after the PBOC on Wednesday announced a
loosening of conditions on targeted RRR cuts, expanding the
scope of such cuts.
    "The looser criteria may help some banks to meet the
second-tier preferential RRR levels. We expect effective date of
the 2019 inclusive finance targeted RRR cut to be around mid or
late January, ahead of the Chinese New Year (CNY) in early
February, to meet the large liquidity demand going into CNY,"
analysts at Citi said in a note. 
    A trader at a fund management firm in Shanghai downplayed
the likelihood of a flood of new cash from the PBOC's latest
move.
    "I don't think it's going to inject huge liquidity into the
system this time," he said.
    He added that despite abundant existing liquidity reflected
in low market rates, money was still not making its way to small
and medium-sized enterprises. Instead, he said traders had been
using excess liquidity to make long bets on Chinese government
bonds in recent weeks.
    On Friday, a Ministry of Finance auction of 10 billion yuan
each of three- and six-month bills saw strong demand, with the
yield on the three-month issue at 2.3115 percent and on the
six-month issue at 2.3798 percent.
    The bid-to-cover ratio on the three-month bill rose to 4.42
from 3.56 at the last auction, and to 3.01 from 2.07 on the
six-month bill.
    Yields for both auctions came in well below the benchmark
yields of 2.4709 percent for three-month and 2.5001 percent for
six-month Ministry of Finance bills.    

  Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        1.6325      1.8901      -25.76                     0.00
                                                                     
                                                                     
 Seven-day        2.3606      2.2967      +6.39                      0.00
                                                                     
                                                                     
 14-day           2.1057      2.2148      -10.91                     0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        2.8500      2.5050      +34.50                     347,905.2
                                                                     0
                                                                     
 Seven-day<CN7DR  2.8000      2.8550      -5.50                      63,118.30
 PO=SS>                                                              
 14-day           2.7700      2.7750      -0.50                      11,510.70
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        1.6700      2.0000      -33.00                     
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        2.4800      2.5500      -7.00                      
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           2.4000      2.5000      -10.00                     
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        1.6490      1.9680      -31.90                     
                                                                     
 Seven-day        2.5630      2.5470      +1.60                      
                                                                     
 Three-month      3.2150      3.2460      -3.10                      
                                                                     
 
KEY INTEREST RATE SWAPS:
 Instrument            RIC         Rate          Spread vs 1 yr
                                                 official deposit
                                                 rate*
 2 yr IRS based on 1   CNABAD2YF=        0.0000              -1.5
 year benchmark                                  
 5 yr 7-day repo swap  CNYQB7R5Y=        0.0000               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
bonds:
 Overview of China financial market data:


    
 (Reporting by Andrew Galbraith; Editing by Sam Holmes)
  
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