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China money markets calm ahead of Q3 health check, holidays
September 27, 2017 / 7:57 AM / 2 months ago

China money markets calm ahead of Q3 health check, holidays

SHANGHAI, Sept 27 (Reuters) - Chinese money markets are approaching a quarterly health check of the country’s banks and a week-long holiday with more placidity than usual, helped in part by increased cash supplies from government spending.

Chinese markets are closed all of next week for a National Day holiday. The banking system will also have its books inspected by the central bank at the end of this week as part of the quarterly Macro Prudential Assessment (MPA).

Despite the increased demand for cash ahead of the holiday and efforts by banks to clean up their lending books for inspection, benchmark repo rates have not spiked higher.

The volume-weighted average rate of the benchmark 14-day repo traded in the interbank market was 3.92 percent on Wednesday afternoon, 11.5 basis points higher than the average close at the end of June but around 60 basis points lower than closing rate on Aug. 31.

That rate had risen as far as 4.94 percent on March 31, when banks were heading into their first MPA inspection for the year.

The widely watched 7-day repo rate has also risen about 60 basis points in little over a week. But even at highs of 3.44 percent on Wednesday, it is a third of the highs around 9.5 percent hit in March and way below peaks hit in July and August.

“Everyone in the market is quite optimistic,” said a trader at a major Chinese commercial bank in Guangdong province.

Traders said cash conditions seemed to be balanced and they were confident that they would remain comfortable in the remainder of the month.

That appeared to also be the reason the central bank drained funds this week from the markets. Wednesday was the sixth straight day the People’s Bank of China (PBOC) refrained from injecting net funds into market via its open market operations.

“Fiscal expenditure were increasing towards the month-end to counter maturing reverse repos, liquidity in the banking system was staying at relatively high level,” the PBOC said in an online statement.

Prior to that, the PBOC had generously injected a net 330 billion yuan into the market through reverse repos.

Some traders estimated the amount of government spending expected to hit the market this week could be between 800 billion yuan ($120.56 billion) and 1 trillion yuan.

Apart from the funding support, economists said the upcoming meeting of the Communist Party Congress, at which President Xi Jinping hopes to strengthen and extend his leadership, was a key reason markets were relaxed.

David Qu, markets economist at ANZ Bank in Shanghai said the central bank was serious about stabilising the market ahead of the 19th Communist Party Congress, which is set to start on Oct.18.

“In the end, it’s the market expectations. Everyone believes that the central bank would keep the liquidity stable,” Qu said.

Qu added he would rather worry about cash conditions at the end of October. That is the time corporates have to make their quarterly tax payments and market participants fear the central bank may no longer find it necessary to contain volatility in the money markets. ($1 = 6.6357 Chinese yuan) (Editing by Vidya Ranganathan and Simon Cameron-Moore)

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