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China's market rates steady as signals more liquidity
May 16, 2014 / 5:47 AM / in 4 years

China's market rates steady as signals more liquidity

* PBOC injects 44 bln yuan via open market operations
    * Policy report discusses slowdown of economy
    * Report implies easing not imminent, but possible in
    * Money market rates seen remaining low until mid-June

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, May 16 (Reuters) - China's money market rates
moved narrowly this week as the central bank signalled it was
taking a more accommodative liquidity stance by injecting cash
into the markets.
    The People's Bank of China (PBOC) injected 44 billion yuan
($7.1 billion) this week through open market operations,
compared with a net drain of 60 billion yuan last week,
reinforcing its relatively dovish behavior in the money markets
this year. 
    The weighted average of the benchmark seven-day bond
repurchase agreement rate stood at 3.11 percent at
midday on Friday, down 6 basis points from last week's close.
    The overnight repo rate rose a moderate 16
basis points to 2.37 percent, while the 14-day repo
 edged up 2 basis points to 4.10 percent.
    Traders see money market rates remaining at relatively low
levels until mid-June when seasonal cash calls at the end of a
quarter will emerge.
    "What is surprising is that the PBOC injected cash this week
in the middle of a month, a time when the liquidity situation is
typically loose and the central bank typically drains money,"
said a dealer at an Asian bank in Shanghai.
    "Its liquidity stance has turned quite dovish so far this
year, although it has yet to give any signs of an immediate
monetary easing via a bank reserve ratio cut."
    Money market conditions have remained much looser this year
compared with the second part of last year, as the PBOC has
withdrawn only moderate amounts of cash through mild operations,
as it aims to support the sagging economy, traders said.
    The central bank has also been willing to keep conditions
looser because banks appear to have reduced shadow banking
activity, which had become a large source of short-term funding
demand prior to an official crackdown on off-balance activities
last year, traders say.
    In its first-quarter monetary policy implementation report
published earlier this month, the PBOC discussed the threat
posted by the sharp slowdown in the world's second-largest
economy. Some traders suggested the central bank could be
preparing for monetary easing.
    Last year, the central bank actively drained cash from the
financial system to suppress a surge in shadow banking, which
posed a threat to financial stability. That caused two market
squeezes in June and December, which roiled global markets.
    But in a sign that shadow bank activity is slowing down this
year, banks' off-balance financing, namely entrusted loans,
trust loans and banks' acceptances, dropped to 27.8 percent of
the country's total social financing in the first quarter, off a
significant 5 percentage points from a year earlier, the PBOC's
monetary policy report showed.
    China's fixed income markets have also seen a steep
downtrend this year, with the benchmark five-year interest rate
swap at 4.07 percent by midday on Friday, compared
with the recent peak of 5.3 percent hit on Jan. 6.
    More liquidity sensitive one-year IRS dropped
to 3.68 percent, from 5.24 percent touched on Jan. 2.
 Instrument        RIC             Rate*    Change (weekly,
 1-day repo                           2.37                +16
 7-day repo                           3.11                 -6
 14-day repo                          3.10                 +2
 7-day SHIBOR                         3.13                 -6
 *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                  2.9177           -8.23
 year benchmark                               
 5 yr 7-day repo swap                   3.68             +68
 1 yr 7-day repo swap                   4.07            +107
 *This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise.                

 Instrument          RIC       Price    Change
                                (Yuan)  (weekly)
 Jun 2014 5 yr                   92.95           -0.40
 Sep 2014 5 yr                   93.50           -0.21
 Dec 2014 5 yr                   93.60           -0.10
    - China money dealers see stability, not easing going
    - 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:
    - Maturing central bank bills and repos upcoming GRAPHIC:
    - Chinese government bond curve rises on rate reform
expectations GRAPHIC:
    - China's interest-rate swap curve rises, flattens on
liquidity fears GRAPHIC:
    - China corp bond spreads widen on risk aversion GRAPHIC:
($1 = 6.22 Chinese yuan)

 (Editing by Jacqueline Wong)

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