May 11, 2018 / 8:31 AM / a year ago

China money rates fall on near-term liquidity, but may tick up ahead

    SHANGHAI, May 11 (Reuters) - China's primary money rates are lower this week amid relatively
loose cash conditions, but longer-term rates suggest tighter liquidity as the central bank
maintains its policy stance, and as mid-year tax payments approach.
    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 2.6907
percent. That is 1.4 basis points lower than the previous week's closing average rate of 2.7047
    The Shanghai Interbank Offered Rate (SHIBOR) for same tenor fell to 2.7130 percent, or 9.3
basis points lower than the previous week's close of 2.8060 percent.
    The one-day or overnight rate stood at 2.4509 percent and the 14-day repo stood at 3.1382
    Market watchers and participants said that overall market liquidity has been ample in the
weeks following a reduction in banks' reserve requirement ratio (RRR), which took effect on
April 25. 
    A reduction in cash demand following a month-end peak has also helped to nudge rates lower,
despite the People's Bank of China (PBOC) draining a net 140 billion yuan from markets for the
week, the third consecutive week of drains.
    However, longer-term rates have been edging higher, pointing to expectations of tigther
conditions as mid-year tax payments approach, and as the central bank keeps its policy stance
    "After the RRR cut, the central bank's tightening operations have helped to correct
expectations of a shift in monetary policy," Huachuang Securities analysts wrote in a note.
    Factors including banks bringing wealth management products back onto their balance sheets
will force the PBOC to continue "appropriately" reducing reserve requirements, the analysts
said. "But at the same time, the central bank will manage overall liquidity through controlling
other open market operation tools, and maintain stable monetary policy."
    A trader at a regional bank in Shanghai said that trade had been "difficult" in the weeks
since the RRR cut.
    "Liquidity is relaxed, but rates on negotiable certificates of deposit (NCD) have been
steadily moving upward, and after all it's almost the middle of the year," she said. "If you
want to look at how banks are preparing to enter the second half, you should look at three-month
NCD rates."
    The yield on three-month AAA-rated NCDs had risen 45 basis points since April 25 to 4.15
percent on Thursday, the most recent day for which there is data. That was its highest level
since March 23.
    The three-month SHIBOR stood at 4.0340 on Friday, up 5 basis points since the RRR cut on
April 25.

  Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.4509      2.4830      -3.21                      0.00
 Seven-day        2.6907      2.6797      +1.10                      0.00
 14-day           3.1382      3.1213      +1.69                      0.00
 Shanghai stock exchange repo market
 Overnight        2.5000      2.3400      +16.00                     695,161.1
 Seven-day<CN7DR  3.1100      2.8650      +24.50                     67,439.80
 14-day           3.4800      3.2600      +22.00                     18,438.50
 PBOC Guidance Rates
 Overnight        2.4700      2.5000      -3.00                      
 Seven-day        2.7200      2.7000      +2.00                      
 14-day           3.2000      3.1700      +3.00                      
 Overnight        2.4870      2.5090      -2.20                      
 Seven-day        2.7130      2.7230      -1.00                      
 Three-month      4.0500      4.0340      +1.60                      
 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=        3.5700               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 bonds:
 Overview of China financial market data:

 (Reporting by Andrew Galbraith
Editing by Jacqueline Wong)
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