February 7, 2017 / 3:15 AM / 6 months ago

China's money rates fall despite lack of PBOC open market ops

8 Min Read

SHANGHAI, Feb 7 (Reuters) - China's primary money rates fell
on Tuesday, despite the central bank skipping open market
operations for the third straight session in what traders said
was a bid to tighten liquidity after the Lunar New Year holiday.
    The volume-weighted average rate of the benchmark seven-day
repo, considered the best indicator of general
liquidity in China, was 2.3912 percent, more than five basis
points lower than the previous day's closing average rate.
    Traders said liquidity conditions were balanced, with few
signs of tightness, despite the central bank's decision to skip
open market operations for three straight trading days,
including Saturday, which was a make-up day for the Lunar New
Year holiday break.
    The People's Bank of China (PBOC) has drained a net 270
billion yuan so far this week.
    "The overall liquidity in the banking system is staying at a
relatively high level," the PBOC said in a statement published
on its website.
    In order to "keep liquidity basically stable in the banking
system", the central bank decided to skip reverse repurchase
agreement operations, which inject money into the banking
system, it added.
    Maturing Chinese central bank reverse repos will drain 625
billion yuan ($91.01 billion) this week, according to Reuters
calculations. 
    The PBOC is expected to drain additional funds when the
temporary liquidity facility (TLF) is due to mature late next
week. The TLF is a new tool introduced by the central bank in
mid-January to help keep major commercial banks flush with
funds. 
    Some market participants said the TLF had added around 600
billion yuan in liquidity. Analysts have said they did not
expect the central bank to roll over the loans.
    Two batches of central bank-issued medium term lending
facility (MLF) loans, with a total value of 205 billion yuan,
were also set to mature in mid-February, which had raised some
concerns prior to Lunar New Year about the possiblity of an
unusual post-holiday liquidity squeeze.
    Although the net drain is quite huge in February, most of it
has not matured yet, and the market can still meet the cash
demand," CITIC Securities said in a note.
    The decision by the central bank to skip open market
operations showed that the bank was sticking with its neutral
and prudent monetary policy, which aims to "fend off risks and
deleverage", it said.
    The PBOC usually injects huge amounts of liquidity ahead of
the Lunar New Year, China's biggest holiday, to meet cash demand
from both households and companies, then drains most of the
funds after the week-long holiday.
    In 2016, the bank lent a net 1.14 trillion yuan in the three
weeks ahead of the holiday, when cash withdrawals reached a
peak. The bank soaked up 1.375 trillion yuan afterwards.
    This time, the PBOC surprised financial markets by
increasing the interest rates on open market operations by 10
basis points on the first day back from the Lunar New Year
holidays.
    While the rate increases were modest, they reinforced views
that Chinese authorities are intent on both containing capital
outflows and reining in risks to the financial system created by
years of debt-fueled stimulus.
    In the bond market, the most traded 10-year treasury futures
for June delivery edged up 0.2 percent as of 0233 GMT.
While yields on the benchmark 10-year treasury bonds 
stood at 3.474 percent, around two basis points higher than the
previous close.
    The Shanghai Interbank Offered Rate (SHIBOR) for seven-day
tenor fell to 2.6280 percent, two basis points lower than the
previous close.
 

 Key money rates at a glance:
  
                  Volume-wei  Previous    Change (bps)               Volume
                  ghted       day (%)                                
                  average                                            
                  rate (%)                                           
 Interbank repo market
 Overnight        2.2601      2.2724      -1.23                      0.00
                                                                     
                                                                     
 Seven-day        2.3912      2.4454      -5.42                      0.00
                                                                     
                                                                     
 14-day           3.0191      3.0423      -2.32                      0.00
                                                                     
                                                                     
 Shanghai stock exchange repo market
 Overnight        2.8950      0.7000      +219.50                    113,971.2
                                                                     0
                                                                     
 Seven-day<CN7DR  3.1600      2.5150      +64.50                     16,349.40
 PO=SS>                                                              
 14-day           3.4100      3.3000      +11.00                     2,026.30
                                                                     
                                                                     
 PBOC Guidance Rates
 Overnight        2.2700      2.2500      +2.00                      
 <CN1DRPFIX=CFXS                                                     
 >                                                                   
 Seven-day        2.5500      2.5000      +5.00                      
 <CN7DRPFIX=CFXS                                                     
 >                                                                   
 14-day           3.3000      3.0000      +30.00                     
 <CN14DRPFIX=CFX                                                     
 S>                                                                  
 SHANGHAI INTERBANK OFFERED RATE
 Overnight        2.2780      2.2571      +2.09                      
                                                                     
 Seven-day        2.6280      2.6480      -2.00                      
                                                                     
 Three-month      3.9497      3.9348      +1.49                      
                                                                     
 
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=        3.9200               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 = 6.8671 Chinese yuan renminbi)

    
 (Reporting by Winni Zhou and John Ruwitch)

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