June 1, 2018 / 9:10 AM / in 19 days

China's money rates surge, then ease after month-end demand fades

    SHANGHAI, June 1 (Reuters) - China's onshore and offshore
money rates surged much of this week, then eased on Friday as
the end-of-month demand that drove rates higher dissipated.
    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, climbed to a
high of 5 percent at one point on Thursday, and was 2.9391
percent on Friday afternoon. 
    That was still about 11 basis points higher than the
previous week's closing average rate of 2.8305 percent, but
traders said supply and demand were balanced.
    This week's tight liquidity spawned some speculation among
traders that the People's Bank of China would cut banks' reserve
requirement ratio (RRR) in June. The last reduction was in
April.
    Most analysts expect another 100 bps RRR cut in the second
half of the year, especially as increasing signs emerge that
smaller firms are more concerned about tightening in
funding.
    "Liquidity issues may regain focus due to heavy maturities
of previous open market operations," Christy Tan, head of Asia
markets research for National Australia Bank said in note this
week. "More RRR cuts could be imminent."
    But liquidity stress at the end of May mainly stemmed from
corporate tax payments, which drained large funds from banks, a
person knowledgeable about the banking system said. 
    The central bank's approach continues to be that "reasonable
and appropriate" liquidity levels have to be maintained, the
person said. 
    This week's tension in the onshore money market spread to
offshore and triggered a spike in the offshore interbank yuan
borrowing cost.    
    In Hong Kong, the offshore yuan overnight borrowing rate, or
HIBOR,, jumped to 6.07100 percent on Thursday, the
highest since June 1, 2017. But with liquidity improved on
Friday, the rate fell to 2.58667 percent, more than 60 basis
points lower than the previous Friday's fix of 3.21467 percent.
    A long-awaited inclusion of Chinese stocks into MSCI
indexes, expected to drive strong demand for the Chinese
currency, barely impacted money markets.
    "The estimated cash flow triggered by the MSCI inclusion is
not huge," said David Qu, markets economist at ANZ Bank in
Shanghai.
    Qu added that borrowing costs onshore and off gradually
converged as some offshore clearing banks were now able to
access onshore liquidity.
    The PBOC in May introduced measures to support cross-border
fund flows, allowing banks involved in offshore yuan clearing
and settlement to tap onshore liquidity. 
    In open market operations, the PBOC injected a net 410
billion yuan ($63.91 billion) via reverse repos this week,
compared with 30 billion yuan of net drain a week earlier.

    

Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        2.7992      2.8964      -9.72                      0.00
                                                                     
                                                                     
 Seven-day        2.9391      2.8904      +4.87                      0.00
                                                                     
                                                                     
 14-day           3.6357      4.3528      -71.71                     0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        5.9050      5.2500      +65.50                     747,783.5
                                                                     0
                                                                     
 Seven-day<CN7DR  3.5000      4.2550      -75.50                     60,780.70
 PO=SS>                                                              
 14-day           3.6500      3.7050      -5.50                      6,931.60
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        2.8200      2.8300      -1.00                      
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        3.2000      3.5400      -34.00                     
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           3.6700      4.3000      -63.00                     
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        2.8010      2.8310      -3.00                      
                                                                     
 Seven-day        2.8970      2.8980      -0.10                      
                                                                     
 Three-month      4.3390      4.3290      +1.00                      
                                                                     
 
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=        3.5500               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 = 6.4156 Chinese yuan)

    
 (Reporting by Winni Zhou and John Ruwitch; Editing by Richard
Borsuk)
  
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