August 31, 2018 / 7:26 AM / 3 months ago

China's money rates inch up on month-end demand, liquidity levels ample

    SHANGHAI, Aug 31 (Reuters) - China's primary money rates
edged up for the week due to higher month-end cash demand, but
liquidity remained very ample despite a central bank-led cash
drain. 
    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 2.6103
percent on Friday afternoon, about 3 basis points higher than
the previous week's closing average rate of 2.5776 percent. 
    Cash conditions continued to be loose with market sentiment
stable this week, traders said, as liquidity support from
month-end fiscal expenditure offset some seasonal demand for
funds from both corporates and financial institutions.  
    "There is no difficulty going through the month-end given
sufficient money supply in the market. And recent loose
conditions are likely to persist," said a trader at a Chinese
bank.
    Traditionally, the Ministry of Finance increases its monthly
distribution of deposits to firms and individuals who benefit
from government programmes towards month-end, lifting deposits
in the banking system.
    The People's Bank of China (PBOC) also attributed the high
liquidity to rising fiscal expenditure at the end of the month,
which had prompted it to skip reverse repo operations for eight
straight days. 
    Maturing reverse repos drained a net 170 billion yuan
($24.89 billion) of funds from interbank money market for the
week. The outstanding balance had fallen to zero at the end of
this week.
    Separately, the central bank's latest move to adjust its
methodology for fixing the yuan's daily midpoint to keep the
currency market stable settled a market discussion about the way
the PBOC is likely to adjust short-term market rates.

    Previously, some market participants argued that falling
interbank market rates and high liquidity could weigh on the
fragile yuan, which was already under depreciation pressure from
the intensifying trade friction between China and the United
States.
    M.K. Tang, senior China economist at Goldman Sachs said the
"counter-cyclical" factor could help create scope for Chinese
domestic interest rates to "stay low, if not even a little bit
lower". 
    "So now another way of looking at the 'counter-cyclical
factor' (CCF) essentially is that CCF is a way for the
policymakers to more effectively manage the FX front of the
economy," he said. 
    "So with that in place, or with that more firmly in place,
what that means is that actually policymakers would have a
little bit more autonomy and a little bit more scope to manage
domestic interest rates, independent of what is going to happen
in the rest of the world, including the Fed's interest rates."
    
    Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        2.2702      2.2454      +2.48                      0.00
                                                                     
                                                                     
 Seven-day        2.6103      2.6115      -0.12                      0.00
                                                                     
                                                                     
 14-day           2.5459      2.5756      -2.97                      0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        2.5550      2.5100      +4.50                      208,110.3
                                                                     0
                                                                     
 Seven-day<CN7DR  2.5800      2.5850      -0.50                      45,877.70
 PO=SS>                                                              
 14-day           2.5700      2.5600      +1.00                      9,315.30
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        2.3400      2.3000      +4.00                      
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        2.6600      2.7000      -4.00                      
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           2.7000      2.7000      +0.00                      
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        2.3090      2.2770      +3.20                      
                                                                     
 Seven-day        2.6330      2.6400      -0.70                      
                                                                     
 Three-month      2.8940      2.8940      +0.00                      
                                                                     
 
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=        3.1900               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 = 6.8291 Chinese yuan)

    
 (Reporting by Winni Zhou and Andrew Galbraith
Editing by Eric Meijer)
  
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