| SHANGHAI, Sept 13
SHANGHAI, Sept 13 China's money rates rose
sharply for the second straight session on Tuesday as the
central bank kept campaigning against short-term leverage and
the prospect of higher U.S. rates raised the spectre of renewed
The volume weighted average of the 14-day and
one-month bond repurchase agreement (repo) rates
were up 19 basis points and nine basis points respectively.
Tuesday's moves came after the central bank conducted 28-day
reverse repos in the interbank market for the first time since
February, and lowered its 28-day guidance rate.
The seven-day average rate stood at 2.38 percent, up six
basis points on the day, while the overnight rate was 2.15
percent, up two basis points.
Analysts say the People's Bank of China (PBOC) is in the
tricky position of trying to combat rising financial risks by
encouraging longer tenor money market lending without impacting
credit to the real economy - all while renewed signs of capital
outflows make cash scarce.
China's overnight repo benchmark notched its highest average
close since January on Monday, after reports of heavy foreign
exchange sales by state banks raised trader suspicions they were
acting to support the yuan.
Selling dollars and buying yuan supports the value of the
currency but also tends to tighten yuan liquidity.
After tapering in mid-2016 from record late 2015 levels,
capital outflows have strengthened in recent weeks, analysts
say, adding pressure on the central bank to keep the currency
from falling too fast.
Capital left China in August at the fastest pace since
January, Singapore-based Capital Economics says.
Julian Evans-Pritchard, its China economist, said the August
drop in reserves "points to continued intervention" by the PBOC
and suggests outflows remain sizable, so the yuan "will stay
under pressure in the coming months".
Also pressuring money markets, traders say, is the PBOC's
campaign to push interbank lending into longer, higher interest
rate tenors to combat growing leverage in the bond market.
In late August, Reuters reported that the central bank asked
banks to spread the tenor of money market lending to reduce
concentration in the cheaper overnight segment.
With the PBOC determined to squeeze the short-term leverage
out of bonds, the Federal Reserve likely to raise rates and cash
demand strong before China's National Day holiday begins Oct. 1,
the stars have aligned for tighter money market liquidity.
"The 28-day reverse repo volume isn't small, but right now
cash truly is a little tight, and this kind of longer term cash
is necessary," a Shanghai bank trader said.
(Reporting by Nathaniel Taplin and the Shanghai Newsroom;
Editing by Richard Borsuk)