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China money rates tumble in week after holiday, downside seen limited
February 14, 2014 / 5:36 AM / 4 years ago

China money rates tumble in week after holiday, downside seen limited

* Money rates ease despite large PBOC fund drains
    * But conditions will tighten in coming weeks
    * Required reserves, tax payments will drain funds
    * PBOC seen sticking to tight liquidity policy in Q1
    * Impact of U.S. QE tapering to be gradually felt in 2014

    By Lu Jianxin and Gabriel Wildau
    SHANGHAI, Feb 14 (Reuters) - China's money rates slumped by
around 100 basis points this week as funds flowed back into the
banking system following the week-long Lunar New Year holiday,
offsetting a large liquidity drain by the central bank, traders
said.
    The benchmark seven-day bond repurchase rate 
tumbled 104 bps from the end of last week to 4.4 percent on a
weighted-average basis.
    The 14-day repo rate slumped 110 bps to 4.56
percent, while the overnight repo rate was down
100 bps at 3.26 percent.
    The People's Bank of China (PBOC) skipped regular open
market operations this week, allowing maturing reverse repos to
automatically drain 450 billion yuan ($74.2 billion) from the
markets. 
    "Cash still flooded the markets today," said a dealer at a
Chinese commercial bank in Shanghai. 
    "But liquidity conditions will soon tighten, with banks
putting aside more reserves and companies paying taxes in the
second half of this month."
    The rebound in bank deposits following the holiday means
that banks will have to put aside more reverses at the PBOC on
the 15th of the month. To stay in compliance with the required
reserve ratio, commercial banks must adjust their central bank
reserves on the 5th, 15th, and 25th of each month in line with
changes in their deposit balances.
    February is also typically one of the months when companies
settle income tax liabilities from the previous year, traders
said. That will also drain funds from the banking system as cash
flows out of commercial banks into fiscal deposits held at the
central bank.
    Traders say liquidity may remain relatively tight in the
weeks ahead as the PBOC maintains the tight-money stance it
initiated last June. The central bank is trying to clamp down on
excessive credit creation through the shadow banking system,
traders said. 
    "Since 2013, interest rates in financial markets have
generally risen with sharper volatility..., reflecting a
'conflict' between excessively strong demand for liquidity and
appropriate supply," the PBOC said in its latest quarterly
monetary policy report published over the weekend.
    "In the next stage, the central bank will further improve
its liquidity management models with a combination of quantity
and pricing tools with prudent macroeconomic policy," it said, 
in a statement traders said signals a continuation of the tight
liquidity stance.
    Traders also expect the impact from the U.S. Federal
Reserve's decision to reduce its bond buying program to produce
a gradual tightening effect over the course of
2014. 
    Reflecting these factors, many traders expect the seven-day
repo rate's 250-day moving average to rise about 50 bps to 4.5
percent in the first half of this year, from around 4.0 percent
in late 2013 and 3.5 percent in mid-2013.
    
 SHORT TERM RATES: 
 Instrument        RIC             Rate*    Change (weekly,
                                            bps)**
 1-day repo                           3.26               -100
 7-day repo                           4.40               -104
 14-day repo                          4.56               -110
 7-day SHIBOR                         4.44                -97
 *The volume-weighted average price (VWAP) at midday Friday
** Compared to the VWAP at market close the previous Friday
    
KEY INTEREST RATE SWAPS:
 Instrument            RIC           Rate     Spread (bps)*
 2 yr IRS based on 1                  2.9588           -4.12
 year benchmark                               
 5 yr 7-day repo swap                   4.86            +186
 1 yr 7-day repo swap                   4.74            +174
 *This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise.                

GOVERNMENT BOND FUTURES
 Instrument          RIC       Price    Change
                                        (weekly, pct)
 Mar 2014 5 yr                  92.520           +0.03
 Jun 2014 5 yr                  92.920           +0.11
 Sep 2014 5 yr                  93.132           +0.09
    
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>    
    MARKET DRIVERS
    - Tax man attack on shadow banking startles markets
 
    - China eases Jan credit squeeze with cash, surprising
transparency 
    - Market braces for bouts of tight liquidity in 2014
 
    - Beijing eases corporate debt rules to offset crackdown
 
    - China corporate financing squeezed as reform plans spark
rate spike 
    
    DATA POINTS
    - Fiscal deposits drive interbank liquidity trends GRAPHIC:
link.reuters.com/pem75t
    - China hot money tracker: Hot money inflows slow to a
trickle in Dec 2013 GRAPHIC: link.reuters.com/saz74t
    - Maturing central bank bills and repos upcoming GRAPHIC: r.reuters.com/vyr95t
    - Chinese government bond curve rises on rate reform
expectations GRAPHIC: link.reuters.com/jyr95t
    - China's interest-rate swap curve rises, flattens on
liquidity fears GRAPHIC: link.reuters.com/ryr95t
    - China corp bond spreads widen on risk aversion GRAPHIC: link.reuters.com/bas95t
  
     >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   
($1 = 6.06 Chinese yuan)

 (Editing by Kim Coghill)

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