July 20, 2018 / 7:31 AM / a month ago

China's money rates fall as c.bank boosts liquidity with eye on trade war

    SHANGHAI, July 20 (Reuters) - China's primary money rates
fell this week as the central bank pumped cash into the banking
system, and as it prepared to soften small firms' financing
burdens in an attempt to hold off risks posed by a U.S.-China
trade war.
    On Friday, the People's Bank of China (PBOC) skipped its
regular open market operations, bringing total injections into
the country's interbank market for the week to 540 billion yuan
($79.80 billion), the largest net weekly injection since
February.
    The operations added cash to what several traders said has
been already ample liquidity in the market in recent weeks,
driving rates down.
    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 2.6243
percent on Friday afternoon, 2.2 basis points lower than the
previous week's closing average rate. 
    The Shanghai Interbank Offered Rate (SHIBOR) for same tenor
fell to 2.6750 percent, 1.1 basis points lower than the previous
week's close.
    The one-day or overnight rate stood at 2.3277 percent and
the 14-day repo stood at 2.8583 percent.
    This week's net injection comes as the PBOC is seen
preparing to further enhance market liquidity levels and channel
credit to small and medium-sized firms, with a hot trade war
between the U.S. and China threatening to further slow China's
growth in the coming months.
    The central bank is expected to boost liquidity of
commercial banks to drive lending and to encourage them to buy
bonds from entities like enterprises and local government
financing vehicles. It has also been encouraging commercial
banks, especially those who have invested in lower-rated bonds,
to tap its Medium-Term Lending Facility (MLF).
    These moves are expected to lend a hand to smaller firms
that have struggled for financing amid a multi-year deleveraging
campaign, though a fixed-income analyst at a domestic securities
firm said it revealed a central tension of government policy
making.
    "It's a battle between fiscal policy and monetary policy,"
said the analyst, who asked not to be named as he is not
authorised to speak with media.
    Under the influence of looser liquidity, yields on
short-term interbank debt have fallen to levels last seen in
2016.
    On Thursday, the most recent day for which data is
available, the yield on 3-month negotiable certificates of
deposit (NCD) was at 3.45 percent, down 185
basis points from the end of 2017. Li Qilin, an analyst at
Lianxun Securities, said in a note that the main impetus behind
falling NCD rates was strong market demand.
    "One factor is the impact of real loosening of liquidity and
expectations of future loosening have had on short-end rates,
another is that after the strengthening of financial
regulations, the trend of institutional investing to shorter and
more conservative investments has led to increased allocation in
NCDs," he said.
    The market continues to view broader policy loosening as
unlikely, with Beijing's hands tied by its own deleveraging
pledge and by worries that moves like cutting benchmark interest
rates could trigger a spike in capital outflows.
    China's yuan hit new one-year lows on Friday, dragged down
by worries over the trade war and slowing growth, but was then
seen trading higher as major state banks moved in to support it.

 

 Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        2.3277      2.3846      -5.69                      0.00
                                                                     
                                                                     
 Seven-day        2.6243      2.6331      -0.88                      0.00
                                                                     
                                                                     
 14-day           2.8583      2.8892      -3.09                      0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        2.5250      2.4900      +3.50                      318,352.1
                                                                     0
                                                                     
 Seven-day<CN7DR  2.5850      2.4850      +10.00                     49,276.50
 PO=SS>                                                              
 14-day           2.9000      2.9700      -7.00                      7,850.00
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        2.3400      2.4100      -7.00                      
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        2.6500      2.6600      -1.00                      
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           3.1000      3.1000      +0.00                      
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        2.3460      2.4160      -7.00                      
                                                                     
 Seven-day        2.6750      2.6830      -0.80                      
                                                                     
 Three-month      3.5360      3.5610      -2.50                      
                                                                     
 
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=        3.1200               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:


($1 = 6.7668 Chinese yuan)

    
 (Reporting by Andrew Galbraith; Editing by Sam Holmes)
  
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