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China's main money rate drops as c.bank signals more supply to support economy
June 6, 2014 / 6:10 AM / in 3 years

China's main money rate drops as c.bank signals more supply to support economy

* PBOC injects money into market for 4th straight week
    * Govt says to cut reverse requirements for more banks
    * PBOC seen using more short-term tools to supply money
    * May not need stronger monetary policy easing for now

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, June 6 (Reuters) - China's main money market rate
fell again this week as the central bank signalled it will
inject more liquidity into the banking system in response to
government calls to reduce the price of money to support the
slowing economy, traders said.
    The government also said last week that it would lower the
reserve requirement for more banks to free up additional cash
for loans. 
    The weighted average of the benchmark seven-day bond
repurchase agreement rate stood at 3.16 percent at
midday on Friday, down 8 basis points from last week's close.
    Rates of other tenors edged higher as steep falls over the
past several weeks capped a further downtrend, traders said. The
14-day repo added 7 basis points to 3.44 percent.
    Before the week, the seven-day repo rate plunged 83 basis
points last month while the 14-day rate tumbled 86 basis points.
    The People's Bank of China (PBOC) injected a net 73 billion
yuan ($12 billion) this week through its open market operations,
up from a net 20 billion yuan injection last week. It has pumped
a combined net 257 billion yuan into the money markets over the
past four weeks. 
    Traders widely expect the PBOC will further inject money
into the markets by resuming reverse repos in open market
operations, supplemented by other similar tools such as
re-lending, re-discount and short-term lending facilities
(SLFs).

    STRONGER EASING UNLIKELY 
    Money market conditions have remained much looser this year
compared with the second part of last year, as the PBOC has
increasingly eased its grip on liquidity given prolonged
softness in China's economy, traders said.
    Annual economic growth slowed to an 18-month low of 7.4
percent in the first quarter, raising the risk that the
government could miss its growth target - set at 7.5 percent in
2014 - for the first time in 15 years.
    "With the central bank having not yet exhausted its milder
tools, it is unlikely to use stronger easing measures such as
cuts in all banks' reserve requirement or interest rates for
now," said a dealer at a major state-owned bank in Shanghai.
    Traders see money market rates remaining largely stable at
the current relatively low levels in coming weeks.
    China's fixed-income markets have also seen a steep
downtrend this year, with the benchmark five-year interest rate
swap at 3.88 percent by midday on Friday, compared
with the recent peak of 5.3 percent hit on Jan. 6.
    The one-year IRS, which is typically more
sensitive to short-term liquidity conditions, dropped to 3.45
percent, from 5.24 percent touched on Jan. 2.
        
 SHORT TERM RATES: 
 Instrument        RIC             Rate*    Change (weekly,
                                            bps)**
 1-day repo                         2.5953                 +2
 7-day repo                         3.1607                 -8
 14-day repo                        3.4414                 +7
 7-day SHIBOR                       3.1500                 -8
 *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                  2.8710           -12.9
 year benchmark                               
 5 yr 7-day repo swap                   3.88             +88
 1 yr 7-day repo swap                   3.45             +45
 *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                   94.03           -0.09
 Sep 2014 5 yr                  94.462           -0.05
 Dec 2014 5 yr                   94.86           -0.03
    >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>    
    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 = 6.24 Chinese yuan)

 (Editing by Kim Coghill)

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