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China's money rates slip, offer no signs of monetary policy change
June 13, 2014 / 6:20 AM / 3 years ago

China's money rates slip, offer no signs of monetary policy change

* PBOC injects money into market for 5th straight week
    * But stable rates show restrain of liquidity easing
    * Targeted easing not seen involving monetary policy change
for now
    * Next PBOC move could be to resume reserve repos

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, June 13 (Reuters) - China's money rates fell again
this week after the central bank signalled an accommodative
liquidity stance by injecting funds into the markets for the
fifth straight week, in line with Beijing's efforts to boost the
economy, traders said.
    But falls in short-term funding costs have slowed from
recent weeks amid increasing signs the government's efforts to
support the economy have focused on targeted areas rather than 
broader monetary policy, they said. Sweeping monetary policy
easing measures had been expected by some economists.
    The weighted average of the seven-day bond repurchase
agreement rate stood at 3.04 percent at midday on
Friday, down 12 basis points from last week's close. Another
active tenor, the 14-day repo, dropped 21 basis
points to 3.23 percent.
    Before a slowdown in the pace of declines from last week,
the seven-day repo rate plunged 83 basis points last month while
the 14-day rate tumbled 86 basis points amid increasing signs
that Beijing was taking steps to curb slowing growth in the
world's second-largest economy.
    This week, the People's Bank of China announced it would cut
the level of reserves banks must hold for those that have
sizeable loans to the farming sector and small- and medium-sized
firms. 
    The government also announced it planned further big
infrastructure projects including highways, express train
networks and new waterways to keep its economy growing at a
stable rate. 
    But it is precisely such targeted stimulus that makes
dealers believe China won't change its neutral monetary policy
of the past several years unless the economy slows further.
    
    LIQUIDITY TRAP
    The seven-day repo rate, for instance, has failed to breach
key support at 3 percent. It is now hovering at levels post the
global financial crisis, but far higher than during the crisis.
    "It's clear that the government doesn't believe the current
economic slowdown is as serious as during the crisis," said a
senior dealer at a Chinese state-owned bank in Beijing.
    "As such, the market doesn't think the government's latest
move of targeted easing will develop into a full-fledged
monetary easing for now."
    One of the key barriers that keeps the PBOC from rushing
into a monetary easing is that China appears to be facing
increasing signs of a liquidity trap, traders said.
    An article by the central bank's newspaper, the Financial
News, said earlier this year that China's economy has shown
increasingly muted response to increased liquidity supply after
the global financial crisis.
    Large scale injections such as via a cut in banks' required
reserves have seen their impact on the economy lessen over time,
the central bank said., That is a typical sign of a liquidity
trap in which the boost from monetary easing to the economy is
diluted gradually after excessive exposure.
    Still, as a milder step, the PBOC is offering more cash to
the money markets as part of Beijing's efforts for targeted
easing. For instance, it injected a net 104 billion yuan into
the markets via open market operations this week, up from 73
billion yuan ($12 billion) last week. 
    If necessary, the central bank could resume reverse repos
which inject short-term liquidity into the markets as a first
measure to support growth, before it takes stronger measures
such as a reserve ratio cut, traders said.
        
 SHORT TERM RATES: 
 Instrument        RIC             Rate*    Change (weekly,
                                            bps)**
 1-day repo                           2.61                 +1
 7-day repo                           3.04                -12
 14-day repo                          3.23                -21
 7-day SHIBOR                         3.04                -11
 *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                  2.8788          -12.12
 year benchmark                               
 5 yr 7-day repo swap                   3.94             +94
 1 yr 7-day repo swap                   3.48             +48
 *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
                                (Yuan)  (weekly)
 Jun 2014 5 yr                   93.56           -0.44
 Sep 2014 5 yr                   94.22           -0.17
 Dec 2014 5 yr                   94.69            0.10
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>    
    MARKET DRIVERS
    - As cash crunch anniversary looms, traders guess at c.bank
policy direction 
    - China money dealers see stability, not easing going
forward 
    - 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
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 = 6.21 Chinese yuan)

 (Editing by Jacqueline Wong)

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