China IRS, money rates slip as liquidity improves slightly
* Liquidity improves after PBOC money injection
* 1-year, 5-year IRS drop 5 bps
* 7-day repo falls 6 bps, but 14-day rate up 15 bps
* Market expects a July bank reserve ratio cut
By Lu Jianxin and Gabriel Wildau
SHANGHAI, June 27 (Reuters) - China's interest rate swaps and most short-term lending rates dropped moderately on Wednesday after the central bank injected money into the markets a day earlier, helping relieving an acute liquidity squeeze, traders said.
One-year IRS and five-year IRS each fell 5 basis points to 2.60 percent and 2.80 percent, respectively, though traders said further downside will be limited in the near term due to still relatively tight cash flows.
Short- and medium term IRS had recently risen sharply, with one-year IRS jumping 31 bps from June 8 to Tuesday, amid the liquidity squeeze driven by banks' fund demand near the end of the quarter.
Another factor contributing to the tightness was demand for funds by brokerages and fund managers for subscriptions to a major initial public offering.
The People's Bank of China moved to ease the squeeze on Tuesday, injecting 95 billion yuan ($14.9 billion) into the money market through 14-day reverse bond repurchase agreements (reverse repos) in its regular open market operations, among other moves.
"Central bank actions have helped ease the market squeeze but overall the liquidity situation remains relatively tight," said a trader with a Chinese commercial bank in Shanghai.
"The market widely expects the PBOC to cut bank reserve requirement ratios, mostly likely in July, to further inject money into the market. For now, we don't see much room for IRS to fall further," the traded said.
China's benchmark seven-day weighted-average bond repurchase rate was at 4.2405 percent at midday, down slightly from 4.2983 percent at Tuesday's close.
The shortest overnight repo rate plunged to 3.5010 percent from 3.9065 percent.
However, the 14-day rate rose to 4.9153 percent from Tuesday's 4.7586 percent, reflecting market concerns that liquidity could tighten again once the latest reverse repos expire.
Chinese banks are required to adjust their deposit reserves on the 5th, 15th and 25th of each month. They also need more money to meet regulatory requirements, such as the 75 percent loan-to-deposit ratio, at the end of each quarter.
Traders reported that bank deposits have risen sharply recently as banks try to attract more savers to polish their half-year financial statements. The rise increases banks' obligation to set aside reserve payments for July 5, they said.
CITIC Heavy Industries Co, China's fourth-biggest maker of heavy machinery, is launching a 4.13 billion yuan IPO on the Shanghai Stock Exchange, the country's second largest of the year. A two-day period of institutional subscriptions ends on Wednesday, which is the only day for retail subscriptions.
Traders said the IPO could briefly lock up hundreds of billions of yuan for subscriptions.
China's IPOs typically attract huge subscriptions as IPOs often jump on debut, which encourages punters to speculate heavily on newcomers. As a result, large-scale offerings frequently cause short-term volatility in the country's money market.
Current Prev close Change
(pct) (bps) 7-day repo 4.2405 4.2983 - 5.78 7-day SHIBOR 4.1708 4.2800 -10.92 Note: Repo rate is weighted average. ($1 = 6.365 Chinese yuan) (Editing by Richard Borsuk)
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