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China money rates creep up despite big central bank cash injection
August 21, 2012 / 4:57 AM / 5 years ago

China money rates creep up despite big central bank cash injection

* C.bank on pace for largest net cash injection in 7 weeks
    * But repo rates still rise across the curve
    * Month-end factors, tax payments pressure liquidity
    * Traders see no RRR cut this month

    By Gabriel Wildau
    SHANGHAI, Aug 21 (Reuters) - China's key money rates ticked
higher on Tuesday, with the central bank's largest fund
injection since early July failing to ease conditions amid
elevated month-end cash demand and corporate tax payments.
    The People's Bank of China injected 220 billion yuan into
the banking system via reverse repos on Tuesday, against a net
87 billion yuan scheduled to be drained this week due to
maturing bills, repos, and reverse repos. 
    That guarantees a net injection of at least 133 billion yuan
for the week not including additional reverse repos likely to be
auctioned on Thursday. Such an injection would be the largest
since the week of July 2-6.
    "The market demand is quite large. Monday's demand was
really heavy. The central bank's action today basically just
satisfied current demand, but didn't in any way exceed it in a
way that would bring rates down," said a trader at a city
commercial bank in Shanghai.
    Still, Tuesday's relatively large cash injection served to
confirm the new market consensus that the PBOC is unlikely to
cut banks' required reserve ration (RRR) this month.
    "They've already clearly demonstrated their intention," said
the trader, referring to the PBOC's apparent decision to rely on
reverse repos to maintain liquidity as an alternative to RRR, at
least in the short term.
    Despite the large cash injection, rates had limited space to
fall because the central bank pushed the yield up on both its
seven-day and 14-day reverse repos  to
3.40 percent from 3.35 percent, where it had been set since
mid-July. 
    The central bank's repo rate represents the lowest possible
cost of funds for all banks and so effectively puts a floor on
the rate that commercial banks will offer to each other.
    The benchmark weighted-average seven-day bond repurchase
rate rose 12.44 basis points to 3.7480 percent
near midday. The 14-day rate edged up 8.36 bps to
4.5543 percent, a six-week high. 
    Demand for 14-day cash is particularly strong this week
because that tenor extends through the end of the month, when
interbank lending rates typically spike. 
    The spike occurs because large commercial banks, the main
net suppliers of liquidity to the interbank market, usually cut
interbank lending near month-end.
    They do this as a buffer against an expected liquidity loss
when smaller rivals poach large chunks of their deposits in the
last few days of each month to meet the required loan-to-deposit
ratio and other regulatory thresholds.
    Another factor crimping liquidity is the relatively large
volume of corporate tax payments due this month, which causes
corporate deposits to flow out of the commercial banking system
and into the central bank.
                                   Current  Prev close  Change
                                    (pct)               (bps)  
 7-day repo                        3.7480   3.6236      +12.44
 7-day SHIBOR                      3.7458   3.5850      +16.08
  Note: Repo rate is weighted average.
 
($1 = 6.36 Chinese yuan)

 (Editing by Richard Borsuk)

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