September 21, 2018 / 7:27 AM / 8 months ago

China money rates rise as cash demand, bond issuance sap liquidity

    SHANGHAI, Sept 21 (Reuters) - China's primary money rates
rose this week as demand for cash increased ahead of two
national holidays and regular corporate tax payments, and as a
high concentration of local government bond issuance tightened
overall liquidity.
    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 2.6429
percent, 2.45 basis points higher than the previous week's
closing average rate of 2.6184 percent. 
    The Shanghai Interbank Offered Rate (SHIBOR) for the same
tenor rose 0.9 basis points to 2.6540 percent. It had ended the
previous week at 2.6450 percent.
    The one-day or overnight rate stood at 2.5128 percent and
the 14-day repo stood at 2.8331 percent.
    The People's Bank of China (PBOC) chose to skip its regular
open market operations on Friday, but still injected a net 60
billion yuan ($8.78 billion) for the week, following a net
injection of 330 billion yuan a week earlier. 
    In a statement, the bank said its decision to skip
operations Friday took into consideration the ability of
month-end fiscal payment and central treasury cash management
operations to offset government bond issuance and maturing
repurchase agreements while maintaining "reasonably ample
    In addition to its regular open market operations, the PBOC
surprised markets on Monday when it lent 265 billion yuan to
financial institutions through its one-year medium-term lending
facility (MLF), despite no such loans maturing on the day.

    In the past, the PBOC typically only injected MLF loans on
days existing loans were due to mature, but since June it has
injected funds even when no debt was maturing.
    Demand for cash in China typically rises ahead of major
national holidays and tax payment periods, and this week has
been no exception with the Mid-Autumn and Chinese National Day
holidays approaching, said a trader at a regional bank in
    In addition, a directive by China's finance ministry in
August for local governments to speed the issuance of special
bonds used to fund infrastructure projects has played a part in
pushing rates higher.
    While the total number of bonds issued by local governments
is set by a quota at the beginning of the year, the finance
ministry's directive, part of an effort to boost investment amid
signs of slowing domestic growth, has led to a concentration of
issuance that has drained overall liquidity.
    "Local government bond issuance locks up system liquidity,
and spurs higher cash rates. If the central bank doesn't use
short-term liquidity injections to counter this, a further rise
in rates could transfer into credit markets," Ming Ming, an
analyst at CITIC Securities, said in a note.
    A deteriorating financing environment for small companies
facing higher costs for loans and bond issuance could have an
impact on economic fundamentals, making the PBOC's liquidity
actions "appear even more important," Ming said.
    "Against this background, the central bank's operations are
more prominently forward-looking. By countering tightness before
it happens (the PBOC) can maintain relatively stable liquidity
conditions," he said.

Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.5135      2.5152      -0.17                      0.00
 Seven-day        2.6429      2.6469      -0.40                      0.00
 14-day           2.8445      2.8677      -2.32                      0.00
 Shanghai stock exchange repo market
 Overnight        2.5050      2.5550      -5.00                      639,619.6
 Seven-day<CN7DR  3.3500      2.9250      +42.50                     51,673.70
 14-day           3.2000      3.2850      -8.50                      24,848.70
 PBOC Guidance Rates
 Overnight        2.5200      2.5200      +0.00                      
 Seven-day        2.6500      2.6600      -1.00                      
 14-day           3.2000      3.1100      +9.00                      
 Overnight        2.5140      2.5190      -0.50                      
 Seven-day        2.6540      2.6590      -0.50                      
 Three-month      2.8150      2.8120      +0.30                      
 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:

($1 = 6.8370 Chinese yuan)

 (Reporting by Andrew Galbraith; Editing by Simon Cameron-Moore)
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