May 28, 2019 / 9:05 AM / a year ago

UPDATE 1-China's money rates jump after Baoshang Bank takeover stokes liquidity fears

 (Recasts, adds analyst comments in paragraphs 7-11)
    By Andrew Galbraith and Winni Zhou
    SHANGHAI, May 28 (Reuters) - China's primary money rates
rose on Tuesday as market sentiment remained fragile after the
takeover by regulators of a troubled regional bank, heralding a
possible weakening of small banks' ability to access interbank
    The People's Bank of China (PBOC) vowed on the weekend to
offer liquidity support to Inner Mongolia-based Baoshang Bank
           after regulators took it over, citing serious credit
risks posed by the lender.
    While the central bank kept pumping liquidity into financial
system, interbank rates stayed up on worries about broader
contagion risks.    
   The PBOC injected a net 70 billion yuan ($10.14 billion)
through its regular open market operations on Tuesday, following
on from the previous day's 80 billion yuan net cash injection. 
    "The Baoshang incident is pressuring short-term liquidity,"
said a trader at a Chinese bank. "Along with month-end seasonal
factors, cash conditions are becoming tighter and pushing up the
near-date swap points higher. And that has led the swap curve
moving upward."
    Chinese liquidity conditions typically tighten at month-end
as cash demand rises due to factors including bank requirements
for funds to meet regulatory requirements such as
loan-to-deposit ratios.
    Ji Tianhe, China rates and FX strategist at BNP Paribas in
Beijing, said that the takeover of Baoshang could be interpreted
as a "marginal targeted deleveraging" campaign, and could change
the ecosystem of the interbank market.
    "Smaller banks are supposed to serve the real economy, but
some turned out be very active in interbank trading in order to
expand their size. Now this latest move is pushing similar small
lenders back to their core business," Ji said.
    He added that as small banks are not allowed to borrow in
the exchange market and have to largely rely on bigger banks for
interbank funding, "they are now facing a challenging funding
    Fitch Ratings downplayed the effect of the Baoshang takeover
on interbank rates, but said that the regulatory seizure
indicated general weakness among China's smaller lenders.
    "We believe the government's propensity to support small
banks is lower than for the large state banks, while the impact
that a small bank failure would have on market confidence is
untested," the rating agency said in a statement.
    On Tuesday, 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 2.8489%. That was 7.66 basis points higher than the
previous day's closing average rate, and up more than 30 basis
points from the previous week's close of 2.5469%.
    The Shanghai Interbank Offered Rate (SHIBOR) for the same
tenor rose to 2.8230%, up 11.20 basis points from the previous
close, and 23.1 basis points from Friday's closing rate.
    The one-day or overnight rate stood at 2.8000% and the
14-day repo stood at 3.0695%.
    The takeover of Baoshang Bank had jolted markets on Monday,
leading to a rise in yields on some banks' negotiable
certificates of deposit, a popular short-term interbank debt
instrument. The spread between low-rated 3-month NCDs
 and their AAA rated equivalents widened by 4.57
basis points on Tuesday, according to Refinitiv data. 
    Analysts at OCBC bank said in a note on Tuesday that the
takeover had sparked a sell-off in Chinese sovereign bonds on
Monday after reports that corporate deposits and interbank
liabilities over 50 million yuan could be subject to a haircut
of 20%-30%, "due to concern about the possible break of implicit
    "This may cause interbank lenders to reassess their
relationship with the smaller lenders," the analysts said.
    On Tuesday, treasury futures rebounded from what market
watchers viewed as an overcorrection, with the most-traded
contract, for September delivery, climbing as much as
    "Futures took off as soon as the big banks started buying,"
said a Shanghai-based trader at an Asian bank.
 Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.8000      2.6678      +13.22                     0.00
 Seven-day        2.8489      2.7723      +7.66                      0.00
 14-day           3.0695      2.8444      +22.51                     0.00
 Shanghai stock exchange repo market
 Overnight        1.5500      1.9050      -35.50                     655,931.8
 Seven-day<CN7DR  2.8750      3.0100      -13.50                     83,505.10
 14-day           2.7500      2.7400      +1.00                      9,488.30
 PBOC Guidance Rates
 Overnight        2.8200      2.6800      +14.00                     
 Seven-day        3.0000      2.8000      +20.00                     
 14-day           3.3500      2.8500      +50.00                     
 Overnight        2.7600      2.6660      +9.40                      
 Seven-day        2.8230      2.7110      +11.20                     
 Three-month      2.9150      2.9040      +1.10                      
 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=        0.0000               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 = 6.9039 Chinese yuan)

 (Reporting by Andrew Galbraith and Winni Zhou
Editing by Shri Navaratnam)
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