June 20, 2013 / 4:01 AM / 6 years ago

China's money rates hit record, PBOC squares off with market players

* PBOC refuses to use reverse repos to inject money
    * No easing despite signs of economic slowdown
    * C.bank aims to force institutions to de-leverage - traders
    * Panic prevails among some small institutions - traders
    * But conditions expected to improve from mid-July

    By Lu Jianxin and Gabriel Wildau
    SHANGHAI, June 20 (Reuters) - China's interbank funding
costs surged again on Thursday, with the two shortest-term rates
hitting record highs, as the central bank again ignored market
pressure to inject funds into the market, despite fresh evidence
that the economy is slowing.
    The People's Bank of China (PBOC) told the market that it
would not conduct repo business in its regular open market
operations on Thursday, frustrating widespread expectations that
it would use reverse repos to inject cash to ease an acute
market squeeze over the last two weeks. 
    By not easing liquidity conditions, it could exacerbate an
economic slowdown that already appears well under way. China's
factory activity weakened to a nine-month low in June as demand
faltered, a preliminary survey showed on Thursday.
    The benchmark weighted-average seven-day bond repurchase
rate jumped a whopping 380 basis points to a
record high of 12.06 percent, while the overnight repo rate 
 surged 598 bps to 13.85 percent. 
    The State Council, China's cabinet, reiterated its
commitment to prudent monetary policy and moderate credit growth
risks at a meeting on Wednesday afternoon. 
    If money market rates remain high, it could translate into
higher financing costs for businesses, economists say.
    "The central bank appears to be determined to force banks
and other financial institutions, such as funds, brokerages and
asset managers, to de-leverage," said a trader at a major
Chinese state-owned bank in Shanghai.
    "That hardline stance suits the recent government policy of
clamping down on non-essential businesses by financial
institutions, such as shadow banking, wealth management, trust
operations and even arbitrage."
    The money market squeeze that began early this month has
worsened this week, forcing banks and other financial
institutions to trim non-essential businesses, traders said.
    The market has recently been hit by heavy demand for funds,
including from the approach of the quarter-end, when banks need
more cash to meet regulatory checks and to boost reported
deposit totals in their quarterly reports to shareholders.
    Panic prevails in some parts of the money marketsin
particular among some small financial institutions, which have
conducted lots of leverage businesses, traders said.
    But a full-blown crisis is unlikely as liquidity is expected
to improve significantly from mid-July, after the seasonal
effects of the quarter-end fade and a large volume of maturing
PBOC bills and government bonds injects cash into the market,
traders said.
    As an indication that the market expects improved cash
supply in coming weeks, the 14-day repo rate fell
 52 bps to 7.41 percent in early trade on Thursday, while the
21-day rate rose a moderate 8 bps to 7.59
                                 Current  Prev close  Change
                                       (pct)           (bps)  
7-day repo         12.0625  8.2624      380.01
7-day SHIBOR        11.0040  8.0750      292.90
 Note: Repo rate is weighted average.

    - China opens new front in war as yuan speculation distorts
export data 
    - China seeks to curb speculative flows without monetary
    - Markets spin on liquidity switches 
    - Non-bank financing to rise in 2013 
    - External liquidity tracker: Collapse in FX purchases 
hurts liquidity in May link.reuters.com/pem75t
    - Impact of maturing central bank bills and repos GRAPHIC: link.reuters.com/pem75t
    - Chinese government bond curve flattens on liquidity
squeeze, growth concerns GRAPHIC: link.reuters.com/jyr95t
    - China's interest-rate swap curve is inverted on severe
liquidity squeeze GRAPHIC: link.reuters.com/ryr95t
    - China corporate bond spreads have narrowed slightly 
GRAPHIC: link.reuters.com/bas95t
    - Hot money tracker: Hot money inflows have returned in
2013, boosting liquidity GRAPHIC: link.reuters.com/saz74t

 (Editing by Jacqueline Wong)
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