March 19, 2014 / 3:46 AM / in 4 years

China money rates rise suddenly after default reports, but traders blame quarter-end pressure

SHANGHAI, March 19 (Reuters) - China’s benchmark money rates rose sharply on Wednesday following reports of major loan defaults by steel and property companies, but traders said the move was expected given cyclical increases in cash demand toward the end of the quarter.

The benchmark 7-day bond repurchase agreement rate opened at 3.4 percent morning, up from Tuesday’s close of 2.9 percent.

The overnight repo and the 14-day repo rose even more sharply, with the 14-day repo gaining nearly a full percentage point.

While firmer, the levels were not considered to be abnormally high. Several cash crunches last year saw rates spike to as high as 30 percent, alarming domestic and global financial markets.

Bond markets, which had been briefly roiled by reports earlier this week that a Zhejiang property developer was prepared to go bankrupt and default on 3.5 billion yuan ($565.35 million) worth of debt, also showed no strong reaction and a 10-year bond auction by the Ministry of Finance went off as expected.

A trader at an Asian bank said that rates were rising for cyclical reasons -- banks are setting aside money to burnish their books for quarter-end reports to regulators -- and in reaction to reports that less base money is flowing into the banking system thanks to slowing foreign investment and a softening yuan.

“Reports of some debt problems at Chinese companies have no impact on the markets for now because money involved so far is so little compared with vast assets of Chinese banks, and few believe widespread defaults, in particular by major companies, will occur any time soon,” he said.

Benchmark rates have been sliding steadily since late January as the central bank eased the liquidity taps, seen as a way to shore up flagging growth and at the same time discourage hot money inflows pouring into the country to cash in on a rising yuan and high yields.

But traders have long predicted that the low rates would prove unsustainable by the end of March.

“Rates are now rising based on accumulated factors, including reserve requirement payments, tax payments, and then there’s also open market operations and the reduction in foreign exchange purchases by Chinese banks,” said a trader at a joint-stock bank in Shenzhen. ($1 = 6.1920 Chinese Yuan) (Reporting by Pete Sweeney, Lu Jianxin and Chen Yixin; Editing by Kim Coghill)

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