November 14, 2012 / 5:42 AM / 5 years ago

China's money rates mixed ahead of operations

* Banks, companies start considering year-end factors
    * Liquidity dependent on PBOC injection
    * PBOC expected to inject more cash on Thursday
    * But likely to end up the week with net drain

    By Lu Jianxin and Pete Sweeney
    SHANGHAI, Nov 14 (Reuters) - China's money rates were mixed
on Wednesday, with the benchmark seven-day repo rate rising
18.71 basis points, a day before the central bank's open market
operations in which it is expected to inject more money, while
allowing a net drain for the week.
    The People's Bank of China (PBOC) has adopted a strategy to
use short-term reverse repos to help manage market liquidity
since May. The short tenor of such instruments - between seven
and 28 days - means that large injections of cash quickly turn
into commensurately high drains.
    While this allows the bank greater flexibility in
maintaining near-term liquidity without having to resort to
injections of long-term base money supply through reserve
requirement changes, it has made both day-to-day operations and
long-term strategising more complex for market participants.
    The benchmark weighted-average seven-day bond repurchase
rate rose to 3.3498 percent by midday from
Tuesday's close of 3.1627 percent.
    The 14-day repo rate rose to 3.3923 percent
from 3.3471 percent, but the one-day repo rate 
dropped to 2.3066 percent from 2.3252 percent.
    "Some banks have become more cautious about lending, while
non-financial firms increased borrowing moderately, offsetting
good liquidity conditions and keeping money market rates largely
stable," said a trader at a Chinese state-run bank in Beijing.
    "This caution is partly driven by the belief that money
markets have become over-reliant on central bank's cash
injections for liquidity," he said.
    There is still an abundance of liquidity in the market for
now, but banks and companies have already started considering
their positions in light of seasonal surge of demand for cash in
the final few weeks of the year, traders said.
    For this week, 404 billion yuan ($65 billion yuan) in
maturing reverse repos will mature and drain cash. The PBOC
injected 186 billion yuan into the money markets in its open
market operations on Tuesday, but 78 billion of that was created
by seven-day reverse repos which will mature next week, draining
cash again. 
    China's main interest rate swaps (IRS) remained almost
unchanged by midday, with the benchmark five-year IRS
 flat at 3.36 percent. 
                                 Current  Prev close  Change
                                       (pct)           (bps)  
7-day repo         3.3498     3.1627    +18.71
7-day SHIBOR           3.3483     3.1505    +19.78 
 Note: Repo rate is weighted average.
($1 = 6.2252 Chinese yuan)

 (Editing by Sanjeev Miglani)

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