October 31, 2018 / 8:11 AM / 16 days ago

China's overnight money rates jump on seasonal cash demand

SHANGHAI, Oct 31 (Reuters) - China’s overnight money rates jumped to three-week highs on Wednesday, driven by seasonal cash demand on the last trading day of the month.

However, most market participants did not expect the rise in borrowing costs suggested a broader cash crunch, noting rates were likely to pull back at the start of the new month given ample liquidity in the market.

The volume-weighted average rate of the benchmark one-day or overnight repo traded in the interbank market, considered an indicator of general liquidity in China, was 2.3870 percent on Wednesday afternoon.

It was about 85 basis points (bps) higher than the previous day’s closing average rate of 1.5398 percent.

It touched 3.39 percent at one point, the highest level since Oct.10.

Rates for other tenors also rose on Wednesday. The volume-weighted average seven-day repo rate rose to 2.7066 percent, about 18 bps higher than the previous close.

Traders attributed the rise in rates to the unwillingness of bigger banks to lend to smaller peers at the end of the month, when financial institutions traditionally look to shore up cash positions to meet administrative requirements.

One trader at a Chinese bank said the absence of central bank liquidity support through its open market operations also added pressure.

The People’s Bank of China (PBOC) has skipped open market operations since last Friday, and maturing reverse repos drained a total of 420 billion yuan ($60.26 billion) from interbank money market in the past four trading sessions.

The PBOC, in a statement on its website on Wednesday, attributed the “reasonably ample” liquidity to rising fiscal spending at the end of the month to absorb maturing reverse repos.

Market participants did note, however, that persistently high liquidity levels could add pressure on China’s currency.

The yuan is hovering around 10-year lows and looks set to post its longest monthly losing streak on record as U.S. tariffs ratchet up pressure on the already slowing Chinese economy.

Earlier in the session, the PBOC said that it will issue a total of 20 billion yuan ($2.87 billion) of bills out of Hong Kong next month, with analysts interpreted it as a sign that the authorities were keen to defend the yuan from easily breaching the key 7 level. ($1 = 6.9685 Chinese yuan) (Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill)

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