August 15, 2014 / 6:40 AM / 3 years ago

Chinese money rates drop on expectations of policy easing

SHANGHAI, Aug 15 (Reuters) - Chinese money rates dropped
this week as markets expect the central bank may use targeted
interest rate cuts to help boost the economy after China posted
a batch of weak economic data.
    The weighted average of the benchmark seven-day bond
repurchase agreement stood at 3.37 percent by
midday on Friday, down 11 basis points from last week's close.
    The overnight repo rate was at 2.89 percent,
down 10 basis points, while the 14-day repo 
dropped 8 basis points this week to 3.58 percent.
    "Liquidity is tight," said a trader at a Chinese commercial
bank in Shanghai. "Money rates cannot actually reflect real
liquidity conditions."
    Traders said the tightness was partly caused by the demand
for funds created by two initial public offerings of shares
(IPOs), which opened subscriptions to investors on Wednesday and
Thursday.
    One of them, Changbai Mountain Tourism Co Ltd 
froze slightly more than 100 billion yuan ($16.3 billion) in
subscription funds and the other is expected to lock up a
similar amount, local media reported.
    This week, the People's Bank of China (PBOC) injected a net
14 billion yuan into money market via its open market operations
but traders said the amount was too small to boost liquidity
conditions. 
    Reflecting these factors, traders expect the benchmark
seven-day repo rate may find a floor at 3.3-3.4 percent next
week, although expectations of policy easing may help cap  
rises in money rates after helping depress them this week.
    
    POLICY OUTLOOK
    The PBOC increased the supply of liquidity to the money
market in the first half of this year as China's economic growth
slowed and the government sought measures to underpin expansion.
    Still, the amount of money flowing into China's real economy
slowed to the lowest level in nearly six years in July, adding
to fears that a sustained recovery may be at risk in the second
half of the year.
    Chinese banks made 385.2 billion yuan ($62.53 billion) in
new yuan loans in July, down 64 percent from June, while total
social financing, a broad measure of liquidity in the economy,
tumbled 86 percent to 273.1 billion yuan, the lowest in nearly
six years, data showed on Wednesday. 
    While July data pointed to an economy that is struggling,
the PBOC remains concerned that pushing more money into a system
already flush with cash may lead to a further build-up of debt
and encourage speculative activities. 
    Under these conditions, the central bank may use pricing
tools, such as pledged supplementary lending (PSL), to conduct
targeted interest rate cuts over the rest of this year, but is
unlikely to cut benchmark rates across the board, traders said.
    The PSL, similar to the central bank's existing re-lending
monetary tool backed by collateral, has already been used in
individual cases. For instance, the PBOC was reportedly to have
offered 1 trillion yuan via the PSL to the top policy bank,
China Development Bank (CDB), in the first half of this year, to
help guide medium-term interest rates. 
    The interest rate on PSL funds injected into CDB was set at
4.5 percent, the Securities Times reported on Friday, as
compared with the current PBOC benchmark one-year lending rate
at 6 percent.
    This signals a targeted interest rate cut for the borrowers
of the PSL funds from the policy bank, traders said.
    
 SHORT TERM RATES:        
 Instrument     RIC               Rate*    Change (weekly,
                                           bps)**
 1-day repo                          2.89            -10.3
 7-day repo                          3.37           -10.71
 14-day repo                         3.58            -8.13
 7-day SHIBOR                        3.35            -11.1
 
*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                     2.9233               -8
 on 1 year                                  
 benchmark *                                
 5 yr 7-day repo                    3.9400               94
 swap                                       
 1 yr 7-day repo                    3.6450               65
 swap                                       
 *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    Weekly change
                                            (%)
 Sep 2014 5 yr                       92.96           -0.20%
 Dec 2014 5 yr                       93.51           -0.07%
 Mar 2015 5 yr                       94.00            0.09%
 
        >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - China money rates fall, markets return to normal after
deadline passes 
    - China money rates rise moderately, creating market
confidence on liquidity 
    - China money rates rise on quarter-end demand, IPO
speculation [ID: nL4N0P00Q9]
    - China's money rates slip, offer no signs of monetary
policy change [ID: nL4N0OU0LH]
    - 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
liberalizing 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 = 6.15 Chinese Yuan)

 (Reporting by Shanghai Newsroom)

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