China's key money rate closes at multi-year high; trading extended

Wed Jun 19, 2013 10:30am BST

* Trading extended for 30 minutes to let banks borrow money
    * Banks scale back non-essential business, such as arbitrage
    * Benchmark 7-day repo rate jumps to highest since Oct 2007
    * Traders only expected mild PBOC cash injection in near
term
    * But liquidity should improve in medium term

 (Add trading time prolonged, other details)
    By Lu Jianxin and Gabriel Wildau
    SHANGHAI, June 19 (Reuters) - China's short-term funding
costs surged on Wednesday, with the benchmark money market rate
hitting a multi-year high, and authorities postponed the
market's close by 30 minutes to give banks extra time to
complete their borrowing.
    The money market squeeze that began early this month has
worsened this week, forcing banks and other financial
institutions to trim non-essential businesses, such as wealth
management and arbitrage, traders said.
    That response may be welcomed by the central bank, which has
adopted a hawkish stance towards market liquidity since May,
partly to clamp down on an increase in risky shadow banking
activities, traders said.
    But they brushed aside talk that the central bank may cut
banks' required reserve ratio (RRR) to boost liquidity.
    The benchmark weighted-average seven-day bond repurchase
rate jumped 144 basis points to close at 8.24
percent, its highest since October 2007.
    The overnight repo rate rose a whopping 202
bps to 7.69 percent, while the 14-day rate added
150 bps to 7.68 percent.
    Money rates have been on a steep uptrend since mid-May but 
the People's Bank of China (PBOC) has refused to inject cash on
a large scale as it appears to want to squelch expectations that
it would ease monetary policy in the wake of a slew of interest
rate cuts by global central banks earlier this year.
 
    The interbank market decided to extend the trading time to 5
pm (0900 GMT) as many banks failed to obtain enough short-term
money needed for business at the normal closing time of 4:30 pm,
traders said.
    Such trading extensions have occurred several times recently
amid the acute squeeze, traders said.
    "Everybody is disappointed at the central bank's
non-action," said a dealer at an Asian bank in Shanghai. 
    "But careful study does point to the fact the money market
will not lack liquidity in the medium term."
    There has been widespread market talk that China's main
state-owned banks have applied to and pressed the PBOC to cut
RRR to help relieve the market liquidity crunch.
    But traders said the central bank is unlikely to cut RRR
soon as its efforts to reverse market expectations for easing
are just now having an impact. 
    At best, the PBOC may conduct reverse repo business in its
open market operations to inject limited amount of money into
the market, they said.
    The market has recently been hit by heavy fund demand,
including from the approach of quarter-end, when banks need more
cash to meet regulatory checks and to boost reported deposit
totals in their quarterly reports to shareholders.
    Traders expect tight liquidity to last for another few weeks
but to improve significantly from mid-July, after the seasonal
effects of quarter-end fade and a large volume of maturing PBOC
bills and government bonds injects cash into the market. 
   
                                     Current  Prev close  Change
                                       (pct)           (bps)  
7-day repo         8.2624     6.8207    +144.17
7-day SHIBOR           8.0750     6.7030    +137.20 
 Note: Repo rate is weighted average.
    
        >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 
       
    MARKET DRIVERS
    - China c.bank tolerance for cash crunch signals economic
confidence 
    - China opens new front in war as yuan speculation distorts
export data 
    - China seeks to curb speculative flows without monetary
tightening 
    - Markets spin on liquidity switches 
    - Non-bank financing to rise in 2013 
    
    DATA POINTS
    - External liquidity tracker: Collapse in FX purchases 
hurts liquidity in May GRAPHIC: 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
    
($1 = 6.1301 Chinese yuan)

 (Editing by Kim Coghill)
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