September 1, 2017 / 8:31 AM / a year ago

China money rates rise as drains cash, tight conditions likely to persist

    SHANGHAI, Sept 1 (Reuters) - China's primary money rates were higher for the week as the
central bank drained funds for a second consecutive week, but other rates fell as fiscal
expenditure helped to prevent excessively tight conditions. 
    But the central bank's move to ban the issuance of a form of short-term debt, announced on
Thursday, suggests the relatively tight environment may continue as regulators seek to control
banking system risk.
    The volume-weighted average seven-day repo rate traded in the interbank
market, considered the best indicator of general liquidity in China, was 2.9402 percent,
0.99 basis points higher than the previous day's closing average rate, and up from 2.9344 the
previous week. 
    In contrast, benchmark 14-day repos, which are less frequently traded, eased
to 3.8593 percent by 0730 GMT on Friday from 4.1625 percent a week earlier. The volume-weighted
average 14-day repo rate had reached its highest levels since late March on Wednesday.
    The People's Bank of China (PBOC) drained a net 280 billion yuan for the week through open
market operations, less than the 330 billion yuan drained the previous week.
    In a statement last week, the PBOC had said that even after the 330 billion yuan drain,
banking system liquidity remained "appropriate" thanks in part to fiscal expenditure.
    Firms and other institutions, which pay taxes and fees to the government, must deposit these
payments into accounts at designated commercial banks in the form of fiscal deposits. Such
deposits cannot be used by commercial banks and play no role in monetary policy.
    However, three times per month, the commercial banks hand over all of these deposits to the
PBOC where they become part of its monetary base. This base money can be either retained in
times of excess liquidity, or pushed back into the system in the form of finance ministry
spending, deposit auctions and refunds on tax overpayments.   
     A trader at an asset-management firm in Shanghai said that fiscal expenditure continued to
help ensure sufficient liquidity this week.
    "Also after the month-end, financial institutions don't hold their cash to (guard against)
potential money tightening," he said.
    Regulatory moves indicate that deleveraging remains a key priority, and that tight
conditions may continue. From Sept. 1, the PBOC said financial institutions would be barred from
issuing negotiable certificates of deposit (NCD) - a popular short-term debt instrument for
smaller banks in the interbank market - with a tenor exceeding one year.
    While the immediate market impact was limited - traders said NCDs with shorter maturities
saw yields fall on Friday as they responded to relatively ample liquidity conditions rather than
regulatory concerns - some analysts advised caution.
    "The impact of the new rule on the market is relatively small, but the tightening intention
behind it is very clear...this may be the start of a new round of regulatory supervision,"
Huachuang Securities analysts wrote in a note.    
    The rolling over of 600 billion yuan of special treasury bonds on Tuesday was seen as a
non-event in the market, with no impact on liquidity conditions. The PBOC bought all 600 billion
yuan worth of special treasury bonds issued by the Ministry of Finance on Tuesday.

 Key money rates at a glance:
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  rate (%)                                           
 Interbank repo market
 Overnight        2.8049      2.8887      -8.38                      0.00
 Seven-day        2.9402      2.9303      +0.99                      0.00
 14-day           3.8593      4.5135      -65.42                     0.00
 Shanghai stock exchange repo market
 Overnight        4.9050      5.4800      -57.50                     850,922.0
 Seven-day<CN7DR  4.8000      4.5850      +21.50                     74,635.90
 14-day           3.9500      4.2750      -32.50                     5,453.20
 PBOC Guidance Rates
 Overnight        2.8300      2.8500      -2.00                      
 Seven-day        3.4400      3.4400      +0.00                      
 14-day           3.8700      4.6500      -78.00                     
 Overnight        2.8130      2.8310      -1.80                      
 Seven-day        2.8764      2.8879      -1.15                      
 Three-month      4.3741      4.3728      +0.13                      
 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=        3.8300               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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