January 4, 2017 / 5:54 AM / a year ago

China's money rate down, but Hong Kong borrowing cost up

SHANGHAI, Jan 4 (Reuters) - China's primary money rates fell
on Wednesday as seasonal factors faded after the holiday, but
offshore borrowing cost largely rose amid a shrinking yuan pool
in Hong Kong and a reduction in capital outflows from mainland.
    The volume-weighted average rate of the benchmark seven-day
repo traded in the interbank market, considered
the best indicator of general liquidity in China, was 2.2895
percent as of midday, more than 30 basis points lower than the
previous week's closing average rate. 
    Pressure on money rate from year-end holiday factors have
faded and liquidity situations were balanced, even with a slight
loosening bias on Wednesday, traders said. But they don't expect
such conditions to last as the Chinese New Year is approaching.
    "The market has little stress now, but I am not quite
optimistic about liquidity conditions in the next few weeks,"
said a trader at a Chinese bank. "The peak season for cash
demand is coming."
    Institutions will raise provisions as early as next week to
meet cash demand from households and companies, who will shore
up their own positions ahead of the Chinese New Year holiday,
which starts in late January.
    Traders said the central bank had adopted a tight liquidity
stance since the second half of 2016 to curb asset price bubbles
and to reducing leverage in the banking system. The central bank
now uses open market operations to flexibly manage short-term
funds in the system.
    The People's Bank of China drained a net 295 billion yuan 
($42.42 billion) from the money market through open market
operations so far this week. The cash drain followed a net 245
billion yuan drain last week. 
    However, the liquidity situation in Hong Kong tightened this
week with the overnight yuan borrowing rate climbing on Tuesday
to its highest level in more than three months.
    The CNH Hong Kong Interbank Offered Rate benchmark (CNH
Hibor) for overnight tenor, set by the city's
Treasury Markets Association (TMA), was fixed at 16.95 percent
on Wednesday. The rate was fixed at 17.76 percent a day earlier,
the highest since September 19.
    Analysts said the surge in the borrowing cost was a result
of a shrinking yuan pool in Hong Kong as fewer people are
seeking yuan-denominated assets as the currency is expected to
weaken further.
    "The depreciation expectation of the yuan remains and it
takes time for investors to rebuild their confidence in the
Chinese currency. Meanwhile, China has been making efforts to
control capital outflows," said Liao Qun, China chief economist
at Citic Bank International, adding he expects the pressure on
the liquidity would remain in the near future.
    The Chinese authorities rolled out policies over the past
two months to tighten its grip on cross-border cash flow
overseas after the yuan slid to an 8-1/2 year lows. 
    Separately, Ken Cheung, Asian FX strategist at Mizuho Bank
in Hong Kong said the liquidity squeeze in offshore yuan and a
firmer than expected onshore spot yuan guidance rate suggested
that the PBOC "might have stepped up its action to defend the
yuan" ahead of the U.S. President-Elect Donald Trump's
inauguration on January 20. Trump has accused China in the past
of keeping the yuan weak in order to gain trade advantages.
 Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.1113      2.1259      -1.46                      0.00
 Seven-day        2.2895      2.6709      -38.14                     0.00
 14-day           2.4674      2.5052      -3.78                      0.00
 Shanghai stock exchange repo market
 Overnight        3.5200      3.5150      +0.50                      155,268.0
 Seven-day<CN7DR  3.2700      3.2800      -1.00                      41,303.90
 14-day           3.2550      3.5000      -24.50                     4,055.10
 PBOC Guidance Rates
 Overnight        2.1300      2.1500      -2.00                      
 Seven-day        2.5600      2.7000      -14.00                     
 14-day           2.6600      2.6700      -1.00                      
 Overnight        2.1720      2.2090      -3.70                      
 Seven-day        2.5450      2.5890      -4.40                      
 Three-month      3.2912      3.2813      +0.99                      
 Instrument            RIC         Rate          Spread vs 1 yr
                                                 official deposit
 2 yr IRS based on 1   CNABAD2YF=        0.0000              -1.5
 year benchmark                                  
 5 yr 7-day repo swap  CNYQB7R5Y=        3.8350               n/a
*This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise
China FX and money market guide: 
 China debt market guide: 
 SHIBOR rates: 
 Reports on central bank open market operations: 
 New Chinese debt issues: 
 Prices for central bank bills, treasury bonds and sovereign
 Overview of China financial market data: 

($1 = 6.9539 Chinese yuan renminbi)

 (Reporting by Winni Zhou and John Ruwitch; Editing by Simon
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