August 17, 2018 / 7:53 AM / 3 months ago

China's money rates rise on signs of liquidity tightness

    SHANGHAI, Aug 17 (Reuters) - China's primary money rates
rose over the past week as corporate tax payments drove demand
for funds in the financial system, prompting the central bank to
resume liquidity injections through its bond facilities.
    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 2.6418
percent on Friday afternoon, higher than the previous week's
closing average rate of 2.3076 percent.
    After a 19-day hiatus, the People's Bank of China (PBOC)
resumed its reverse repo operations on Thursday to maintain
"reasonable and ample" liquidity in the banking system, it said
in a statement.
    For the week, the central bank injected a net 130 billion
yuan ($18.88 billion) via reverse repos. It lent another 383
billion yuan to financial institutions on Wednesday via its
one-year medium-term lending facility (MLF) with rates
unchanged.
    Traders expect liquidity tightness caused by seasonal
factors, such as tax payments, to be short-lived and cash
conditions to improve next week.
    Nie Wen, an economist at Hwabao Trust in Shanghai, said the
central bank aimed to expand credit to support smaller firms
through the currently accommodative monetary policy.
    "The central bank is likely to maintain the easy policy
stance to improve the transmission mechanism of monetary policy
to alleviate the negative impact on the real economy from tight
credit," Nie said.
    However, ample liquidity has added pressure to the weakening
Chinese currency. With more sweeping U.S. tariffs on Chinese
goods set to kick in next Thursday and China's economy cooling,
some market participants believe a test of the psychologically
critical 7 yuan to the dollar level is only a matter of time.

    Markets are also focused on the question of which way the
central bank is likely to guide short-term market rates. It
could use its lending facilities to raise short-term interest
rates to support the currency or cut rates to support the
economy.
    Ming Ming, an analyst at CITIC Securities, said raising
interest rate might be a better option against the backdrop of
monetary tightening in the United States and yuan depreciation.
    "Raising interest rates is not sacrificing the domestic
economy for the sake of exchange rate," he said in a note this
week. "Stabilising the exchange rate and keeping the financial
environment stable are the basis for steady growth and risk
prevention."
    Ming added that the core issue with the domestic economy was
insufficient demand and shrinking credit, meaning "even if
interest rates remained unchanged or got lower, it would only
lead to a liquidity trap and ... increase pressure on the
economy".
    
    Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        2.5743      2.5054      +6.89                      0.00
                                                                     
                                                                     
 Seven-day        2.6418      2.5760      +6.58                      0.00
                                                                     
                                                                     
 14-day           2.6297      2.5043      +12.54                     0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        2.5000      2.3100      +19.00                     167,398.5
                                                                     0
                                                                     
 Seven-day<CN7DR  2.6600      2.4400      +22.00                     42,698.50
 PO=SS>                                                              
 14-day           2.7600      2.4400      +32.00                     7,396.70
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        2.5900      2.5100      +8.00                      
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        2.6500      2.6000      +5.00                      
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           2.6100      2.5500      +6.00                      
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        2.5800      2.5110      +6.90                      
                                                                     
 Seven-day        2.6500      2.6370      +1.30                      
                                                                     
 Three-month      2.8170      2.8130      +0.40                      
                                                                     
 
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=        3.1600               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 = 6.8853 Chinese yuan)

    
 (Reporting by Winni Zhou and Andrew Galbraith; Editing by Sam
Holmes)
  
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