November 23, 2018 / 8:30 AM / 6 months ago

China money rates edge lower on loose liquidity, near term bias down

    SHANGHAI, Nov 23 (Reuters) - China's primary money rates
ended Friday's session modestly lower from a week earlier and
are set to stay down over the near term as authorities seek to
support slowing growth.
    Traders said liquidity levels remained relatively loose
despite the central bank making no net cash injections or
withdrawals for an unprecedented third straight week.
    A slight drop in money market rates reflected broad
expectations of further policy loosening to shore up an economy
beset by weakening domestic demand and headwinds from its trade
war with the United States.
    Markets aren't expecting much progress on trade talks when
presidents Xi Jinping and Donald Trump meet at a G20 summit in
Argentina next week.
    "The meeting should give an indication of how the trade war
will develop, so for the time being the market is being fairly
cautious," said a trader at a regional bank in Shanghai.
    The closely watched 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 2.5863 percent on Friday.
    That was 1.6 basis points lower than the previous week's
closing average rate of 2.6024 percent.
    The Shanghai Interbank Offered Rate (SHIBOR) for the same
tenor fell just 0.1 basis point from the previous week's close,
to 2.6280 percent.
    The one-day or overnight rate stood at 2.3379 percent and
the 14-day repo stood at 2.5993 percent.
    A second trader at a state-owned bank said mid-month demand
for cash for corporate tax payments had lifted rates earlier in
November. "Overall, rates have been consistently falling since
then," he said.
    The regional bank trader noted that rates actually rose on
Friday following steady declines over the course of the week.
    "It's hard to know exactly what's driving the rise today,
there's no clear factor. I can only say that profit taking
pressure is significant as yields have fallen," she said.
    The Chinese government has been lowering reserve
requirements and trying to stimulate lending to the private
sector, and it is widely expected to try to keep rates down.
    The increasing pressure on the Chinese economy prompted the
Organisation for Economic Cooperation and Development to lower
its forecasts for Chinese GDP growth in 2018 to 6.6 percent,
from 6.7 percent previously, and in 2019 to 6.3 percent, from
6.3 percent previously.
    Taken together with weak credit growth data in China, signs
of a slowing economy have raised expectations that Beijing will
loosen policy further, potentially including its first cut to
the benchmark 1-year lending rate since October 2015.

    But falling yields threaten to constrain Beijing's options
by putting pressure on the yuan as the United States prepares
for further rate hikes.
    The yield on 1-year Chinese government bonds
fell below the yield on 1-year U.S. Treasury bills
this week for the first time in 11 years, while the spread
between Chinese and U.S. 10-year government bonds has narrowed
from 150 basis points at the end of 2017 to 33 basis points as
of Friday.

 Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.3379      2.4397      -10.18                     0.00
 Seven-day        2.5863      2.6049      -1.86                      0.00
 14-day           2.5993      2.6300      -3.07                      0.00
 Shanghai stock exchange repo market
 Overnight        2.6850      2.6400      +4.50                      161,045.9
 Seven-day<CN7DR  2.8950      2.7100      +18.50                     31,750.50
 14-day           2.8000      2.7850      +1.50                      10,203.60
 PBOC Guidance Rates
 Overnight        2.3500      2.4800      -13.00                     
 Seven-day        2.6100      2.6500      -4.00                      
 14-day           2.8500      2.8000      +5.00                      
 Overnight        2.3560      2.4560      -10.00                     
 Seven-day        2.6280      2.6420      -1.40                      
 Three-month      3.0730      3.0640      +0.90                      
 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=        3.2100               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:

 (Reporting by Andrew Galbraith
Editing by Shri Navaratnam)
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