July 27, 2018 / 8:56 AM / 10 months ago

China's money rates steady as easing policy outlook supports liquidity

    SHANGHAI, July 27 (Reuters) - China's primary money rates
were flat this week despite the central bank skipping its
regular open market operations, as a surprise injection of
medium-term cash amid a turn by Beijing toward looser fiscal
policy kept liquidity ample.
    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 2.6242
percent, almost unchanged from the previous week's closing
average rate of 2.6241 percent.
    The Shanghai Interbank Offered Rate (SHIBOR) for the same
tenor fell to 2.6540 percent, or 2.1 basis points lower than the
previous week's close of 2.6750 percent.
    The one-day or overnight rate stood at 2.2560 percent and
the 14-day repo stood at 2.7044 percent.
    The People's Bank of China (PBOC) chose to skip open market
operations for five consecutive days this week, draining a net
370 billion yuan from money markets.
    But surprising the market, the bank lent 502 billion yuan 
($73.76 billion) to financial institutions through its one-year
medium-term lending facility (MLF) on Monday, bringing the value
of outstanding MLF loans to 4.9225 trillion yuan.
    While the injection followed expectations that the PBOC
would boost commercial banks' liquidity to support smaller
private firms, in part by allowing commercial banks to tap MLF
loans, its size and timing were not anticipated.
    The central bank typically injects liquidity through MLF
loans on the day that existing loans are due to mature.
    The injection also encouraged a broader shift in policy
expectations, with Beijing moving to provide more fiscal support
for the country's economy as a growing trade war with the United
States threatens to put the brakes on already-slowing growth.
    On Monday, China's cabinet vowed to adopt a more proactive
fiscal policy, with tax cuts for companies and more local
government special bond issuance, without resorting to strong
policy stimulus.
    "Liquidity in the interbank market is already very good. The
MLF injection is intended to support credit rather than to
support the interbank market," said David Qu, China markets
economist at ANZ in Shanghai. 
    He characterized the central bank's thinking as
"structural," using different instruments to fine-tune both
short- and long-term liquidity levels.
    "It's too early to say that China will engage in broad
easing," he added. "That the PBOC is implementing structural
policy at this stage just shows that it doesn't want, or is
relatively cautious, about going toward broad easing."
    The MLF injection helped to drive down longer-term rates.
The yield on one-year negotiable certificates of deposit (NCDs),
a debt instrument traded on the interbank
market, on Tuesday fell to 3.64 percent, its lowest since Dec.
30, 2016 and a drop of 31 basis points from the end of last
     On Thursday, the yield on three-month NCDs
fell 39 basis points to 3.01 percent, its lowest level since
November 2016.
    Meanwhile, money market yields implied by dollar/yuan
forwards fell sharply after state-run banks were seen heavily
swapping dollars for yuan in the one-year tenor.
    Expectations of looser policy also helped to lower the cost
of insuring exposure to Chinese debt, which rose to more than
one-year highs earlier this month amid escalating United
States-China trade tensions.
    The spread of the five-year credit default swap rate on
Chinese sovereign debt fell to 58.14 basis points
from 64.33 basis points last week.

  Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.2560      2.2938      -3.78                      0.00
 Seven-day        2.6242      2.6338      -0.96                      0.00
 14-day           2.7044      2.7718      -6.74                      0.00
 Shanghai stock exchange repo market
 Overnight        2.6100      2.6100      +0.00                      699,141.6
 Seven-day<CN7DR  2.7500      2.8900      -14.00                     71,606.50
 14-day           2.8000      2.8150      -1.50                      7,598.20
 PBOC Guidance Rates
 Overnight        2.2900      2.3300      -4.00                      
 Seven-day        2.8000      2.7500      +5.00                      
 14-day           3.0000      3.0000      +0.00                      
 Overnight        2.2840      2.3210      -3.70                      
 Seven-day        2.6540      2.6600      -0.60                      
 Three-month      3.3030      3.3630      -6.00                      
 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=        3.1200               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
 Overview of China financial market data:

($1 = 6.8063 Chinese yuan)

 (Reporting by Andrew Galbraith and Winni Zhou; Editing by
Richard Borsuk)
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