April 11, 2014 / 5:41 AM / 4 years ago

China's main money rates rise on tax payments, policy caution

* April sees annual peak of corporate tax payments
    * Officials say no stimulus pending despite slowing economic
    * Traders reading cues that c.bank won't ease monetary
    * Finance ministry bond auction fails to fully sell out

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, April 11 (Reuters) - China's benchmark money rate
rose sharply this week, driven primarily by seasonal cash demand
in April, the month that sees the annual peak of corporate tax
payments in the country, traders said.
    Traders said banks were also cautious about lending funds in
the interbank market following comments by senior officials that
China will not launch a major economic stimulus package,
diminishing hopes that the People's Bank of China would loosen
monetary policy in the near future to shore up economic growth.
    The weighted average of the benchmark seven-day bond
repurchase agreement rate stood at 3.71 percent at
midday on Friday, up 69 basis points from the close of last
    The overnight repo gained 1.34 basis points to
2.74 percent, but the 14-day repo dropped 51
basis points to 3.70 percent.
    "Overall market liquidity conditions are appropriate, partly
due to the central bank's net money injection this week," said a
trader at a Chinese commercial bank in Shanghai, referring to
the PBOC's decision to inject net funds into the market this
week for the first time since late January.
    "However, the market takes officials' comments warning
against investing economic stimulus plans as further evidence
that the PBOC will not ease monetary policy ... keeping supply
relatively tight."
    This sentiment affected a bond auction by China's Ministry
of Finance, which fell short of its 28 billion yuan ($4.5
billion) fundraising goal on Friday as many investors thought
the rates on offer were too low, traders said. 
    The government and central bank should be "very cautious" in
implementing any stimulus programmes because they tend to be
less efficient than natural market forces in boosting growth,
PBOC Vice Governor Yi Gang said on Thursday. 
    His comments, made at a conference in Washington, came after
 Chinese Premier Li Keqiang publicly ruled out major stimulus,
even as big declines in imports and exports for China, announced
on Thursday, added to concerns about a slowdown. 
    Beijing has posted a slew of weak economic data for the
first quarter, sparking speculation among economists that the
government may launch new economic stimulus packages, including
a cut in banks' required reserve ratios (RRR).
    But China's money markets do not buy the story.
    "The PBOC has far from exhausted its tools," said a senior
dealer at a Chinese state-owned bank in Shanghai.
    "Before it cuts RRR, it will first resume reverse repos in
open market operations, supplemented by other similar tools such
as re-lending, re-discount and SLF (short-term lending
    The PBOC has mostly used forward repos to drain liquidity
from the money markets so far this year. 
    Until it injected 55 billion yuan ($8.9 billion) this week
via maturing forward repos to help companies meet seasonal
demand for tax payments this month, it drained a combined 1.036
trillion yuan from the markets in eight weeks in a signal that
the banking system is abundant in liquidity, traders said.
    Chinese markets have also given no indications of an
official interest rate cut.
    Two-year interest rate swaps, the main
indicator of market expectations of the central bank's next rate
move, stood at 2.94 percent at midday on Friday, or 6.16 basis
points below the official one-year yuan deposit rate of 3
 Instrument        RIC             Rate*    Change (weekly,
 1-day repo                         2.7442              +1.34
 7-day repo                         3.7057             +68.92
 14-day repo                        3.7018             -50.67
 7-day SHIBOR                       3.7010              +70.4
 *The volume-weighted average price (VWAP) at midday Friday
** Compared to the VWAP at market close the previous Friday
 Instrument            RIC           Rate     Spread (bps)*
 2 yr IRS based on 1                  2.9384           -6.16
 year benchmark                               
 5 yr 7-day repo swap                 4.5417            +154
 1 yr 7-day repo swap                 4.1867            +119
 *This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise.                

 Instrument          RIC       Price    Change
                                        (weekly, pct)
 Jun 2014 5 yr                   92.33           +0.33
 Sep 2014 5 yr                   92.74           +0.27
 Dec 2014 5 yr                   93.08           +0.35
    - Muted impact of capital inflows a step towards
liberalising deposits 
    - Tax man's attack on shadow banking startles markets
    - China eases Jan credit squeeze with cash, surprising
    - 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 
    - Fiscal deposits drive interbank liquidity trends GRAPHIC:
    - 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 = 6.22 Chinese yuan)

 (Editing by Chris Gallagher)
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