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China money rates stay low; strong yuan could aid liquidity

Friday, 12 Oct 2012 | 12:59 AM ET

* China money rates flat, liquidity remains ample

* Large c.bank fund injections over last two weeks

* Stronger yuan could boost liquidity via bank FX purchases

* But maturing reverse repos, tax payments will drain funds

SHANGHAI, Oct 12 (Reuters) - China's money market rates were little changed on Friday, as conditions remained loose following a large injection of funds by the central bank this week.

The benchmark weighted-average seven-day bond repurchase rate

has fallen sharply this week, reaching 3.1850 percent near midday on Friday compared with Monday's closing at 3.8268 percent. The overnight rate

was little changed at 2.4235 percent.

The seven-day rate followed a similar pattern on the last trading week before the week-long October holiday, peaking at 4.6976 percent on Sept. 25 before tumbling to 3.0355 percent on the last day before the holiday.

In both cases, the tumble in rates followed large cash injections by the central bank in open market operations. The People's Bank of China (PBOC) injected a net 164 billion yuan ($26.13 billion) through reverse repos this week.

That amount was down from the record 365 billion yuan net injection during the pre-holiday week, but still massive compared with the average 37 billion yuan average weekly net injection during 2012.

Future money market rates will largely depend on whether these fund injections continue. Reverse repos totaling 704 billion yuan will mature over the next two weeks, draining funds. In addition, corporate tax payments will draw cash from the commercial banking system in this period.

Still, most traders believe the PBOC is committed to maintaining market liquidity and will continue injecting funds.

Traders also point out that the recent strength of the Chinese currency should also aid money market liquidity.

The yuan reached hit an all-time high on Friday, which traders say suggests there have been heavy capital inflows, partly due to the wave of global liquidity unleashed by the Federal Reserve's launch of QE3.

"Now the yuan is rising, and it feels like money creation via banks' FX purchase could rebound," said a trader at an Asian bank in Shanghai.

The main source of base money creation for the Chinese economy over the past decade has been corporate clients selling forex to commercial banks, who mostly sold it onto the central bank. The central bank's yuan sales to commercial banks expanded the base money supply.

As the yuan weakened against the dollar earlier this year, however, corporates began holding onto their dollars, rather than selling them, which slowed the creation of liquidity.

But with the yuan now strengthening, traders say FX purchases have likely increased in recent weeks.

The central bank could release data on FX purchases later on Friday or this weekend, but the release could also be delayed until the end of October. Current Prev close Change (pct) (bps) 7-day repo 3.1873 3.1855 + 0.18 7-day SHIBOR 3.1725 3.1608 + 1.17

Note: Repo rate is weighted average.

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To see SHIBOR rates, please click

To see stories on China's debt issue

For prices for central bank bills, treasury bonds and

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($1 = 6.2770 Chinese yuan) (Editing by Richard Borsuk)

((gabriel.wildau@thomsonreuters.com)(+86 21 6104-1783)(Reuters Messaging: gabriel.wildau.thomsonreuters.com@reuters.net))

Keywords: MARKETS CHINA BONDS/