July 6, 2018 / 4:25 AM / 16 days ago

China's money rates fall on ample liquidity, bank reserve cut helps supply

    SHANGHAI, July 6 (Reuters) - China's primary money rates
fell over the course of the week on high liquidity, as
quarter-end cash demand faded and as a reduction in banks'
reserve requirement ratio (RRR) came into effect on Thursday.
    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 2.5045
percent on Friday morning, more than 50 basis points lower than
the previous week's closing average rate of 3.0106 percent.
    The loose cash conditions dragged the secondary market rate
below the price the central bank charges bigger lenders in the
primary market. The 7-day reverse repo rate in the primary
market was 2.55 percent.
    Traders said cash conditions were "very loose" this week as
seasonal heavy cash demand from both corporate clients and
financial institutions eased. 
    A trader at a Chinese bank said funds released from the RRR
cut provided additional liquidity, offsetting a central bank-led
cash drain from the interbank money market.
    Market rates were unaffected by the passing of a deadline
for U.S. tariffs on $34 billion of Chinese imports on Friday.
    The RRR cut, which was announced by the central bank on June
24, releases about 700 billion yuan ($105.07 billion) in
liquidity, the People's Bank of China (PBOC) has said.
    In open market operations, the PBOC drained 500 billion yuan
on a net basis this week, as it saw "relatively high banking
system liquidity after absorbing maturing reverse repos", it
said in a statement on its website. 
    The central bank drained a net 370 billion yuan a week
earlier.
    However, market participants do not expect such loose
conditions to be sustainable.
    "As the prudent and neutral monetary policy stance remains
unchanged, the most lenient phase of liquidity conditions might
be over," Qu Qing, chief credit analyst at Huachuang Securities
said in a note. 
    Qu and some traders pointed out that companies will start
making their quarterly tax payments soon, which is likely to
suck funds out of the market.

    Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        1.9024      2.0269      -12.45                     0.00
                                                                     
                                                                     
 Seven-day        2.5045      2.5047      -0.02                      0.00
                                                                     
                                                                     
 14-day           2.4752      2.5782      -10.30                     0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        2.2300      2.0800      +15.00                     138,629.5
                                                                     0
                                                                     
 Seven-day<CN7DR  2.4350      2.3050      +13.00                     30,827.70
 PO=SS>                                                              
 14-day           2.7100      2.5450      +16.50                     14,265.70
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        2.1300      2.2000      -7.00                      
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        2.5500      2.6100      -6.00                      
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           2.6700      2.8000      -13.00                     
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        1.9670      2.1320      -16.50                     
                                                                     
 Seven-day        2.5880      2.6050      -1.70                      
                                                                     
 Three-month      3.7400      3.8180      -7.80                      
                                                                     
 
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=        3.1850               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 = 6.6625 Chinese yuan)

    
 (Reporting by Winni Zhou and John Ruwitch
Editing by Jacqueline Wong)
  
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