August 24, 2018 / 8:36 AM / a month ago

China's money rates fall as PBOC surprises with MLF injection

    SHANGHAI, Aug 24 (Reuters) - China's primary money rates
fell this week despite end-of-month demand, as Beijing stepped
up efforts to encourage lending to weaker companies amid rising
defaults.
    The country's central bank lent more firepower to the push
for easier credit on Friday, unexpectedly injecting more
medium-term cash a day after more tit-for-tat Sino-U.S. trade
tariffs came into effect.
    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 2.5777
percent on Friday afternoon.
    That is 7 basis points (bps) lower than the previous week's
closing average rate of 2.6480 percent. 
    The Shanghai Interbank Offered Rate (SHIBOR) for the same
tenor fell to 2.6120 percent, 3.80 bps lower than the previous
week's close of 2.6500 percent.
    The one-day or overnight rate stood at 2.3742 percent and
the 14-day repo stood at 2.6574 percent.
    Money rates typically rise at month-end as financial
institution demand for cash for regular tax payments picks up.
But the People's Bank of China kept liquidity relatively loose,
injecting a net 40 billion yuan ($5.82 billion) for the week,
after injecting 130 billion a week earlier. 
    On Friday, the PBOC eased conditions further by injecting
149 billion yuan into markets via its one-year medium-term
lending facility (MLF), with the interest rate unchanged.

    While traders said the move had been rumoured and priced
into the market by Friday morning, it still came as a surprise
because the PBOC has in the past typically only injected
liquidity through MLF loans on days existing loans were set to
mature.
    No MLF loans matured on Friday, but the PBOC said in a
statement that the injection was meant to offset government bond
issuance and maturing reverse repos.
    Finance Minister Liu Kun told Reuters that he expects bond
issuance by local governments to support infrastructure
investment to exceed 1 trillion yuan in the first three quarters
of this year as part of a more "proactive" fiscal policy.

    The PBOC said that Friday's MLF injection would help to
"strengthen coordination of monetary policy and fiscal policy"
to maintain "reasonably ample" liquidity in the banking system.
    The MLF injection also followed comments from the central
bank on Tuesday that it would keep liquidity reasonably ample
but not resort to strong policy stimulus.
    The State Council, China's cabinet, said on Wednesday that
China would encourage financial institutions to boost loans to
smaller firms, also without resorting to strong policy stimulus.

    "Monetary policy is still emphasizing avoiding excessive
liquidity and will put more emphasis in the future on policy
transmission mechanisms," Huachuang Securities analysts wrote in
a note.
    "Leaders feel that the credit crisis of smaller companies
has not been solved yet, so they're forcing banks to take money
and lend it to small enterprises," said a trader at a
state-owned bank in Shanghai.
    But the effectiveness of such moves is far from clear.
    Policymakers have tried for at least eight years to improve
financing for smaller firms, but most analysts say the problem
has only grown worse, with state-backed companies continuing to
get the lion's share of cheaper credit.
    The cost of insuring exposure to Chinese debt fell, with the
spread of the five-year credit default swap rate on Chinese
sovereign debt dropping 3.3 percent from a week
earlier to 59.58 basis points.    
 

  Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        2.3742      2.4193      -4.51                      0.00
                                                                     
                                                                     
 Seven-day        2.5777      2.6113      -3.36                      0.00
                                                                     
                                                                     
 14-day           2.6574      2.7730      -11.56                     0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        2.3500      2.4300      -8.00                      678,780.8
                                                                     0
                                                                     
 Seven-day<CN7DR  2.4000      2.5600      -16.00                     56,519.90
 PO=SS>                                                              
 14-day           2.6000      2.6800      -8.00                      8,789.00
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        2.4000      2.4600      -6.00                      
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        2.5000      2.6200      -12.00                     
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           2.8000      2.9500      -15.00                     
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        2.3920      2.4540      -6.20                      
                                                                     
 Seven-day        2.6120      2.6490      -3.70                      
                                                                     
 Three-month      2.8890      2.8870      +0.20                      
                                                                     
 
KEY INTEREST RATE SWAPS:
 Instrument            RIC         Rate          Spread vs 1 yr
                                                 official deposit
                                                 rate*
 2 yr IRS based on 1   CNABAD2YF=        0.0000              -1.5
 year benchmark                                  
 5 yr 7-day repo swap  CNYQB7R5Y=        3.2300               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:


($1 = 6.8740 Chinese yuan)


($1 = 6.8740 Chinese yuan renminbi)

    
 (Reporting by Andrew Galbraith; Editing by Kim Coghill)
  
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