China's money rates tumble, conditions normalising but caution remains
* Key money-market rates approach pre-cash crunch levels
* PBOC's softer attitude last week eased jitters
* 7-day repo rate at lowest level since May 30
* But traders cautious on medium-term outlook
SHANGHAI, July 3 (Reuters) - China's inter-bank funding costs fell sharply on Wednesday, with key rates approaching normal levels following an unprecedented cash squeeze last month, as the impact of a seasonal cash rush fades. Conciliatory statements by the central bank statements last week helped calm investors over future money supply, making banks more willing to lend, traders said. But traders remained cautious about the liquidity outlook for the coming months, especially as growing signs of an economic slowdown threaten to add to strains on the banking system and fuel more capital outflows. The benchmark weighted-average seven-day bond repurchase rate slumped 51 basis points (bps) to 4.25 percent, the lowest since May 30, and near the 3 to 4 percent range where it had hovered for most of the year prior to the liquidity squeeze in late June. The overnight repo rate tumbled 31 bps to 3.40 percent, while the 14-day rate dropped 43 bps to 4.65 percent. "There will be no more squeeze for market liquidity in the near term," said a trader at a Chinese brokerage in Shanghai. "But the market is divided over the prospect of longer-term cash supply, uncertain what the central bank will do." Banking shares in Shanghai and Hong Kong remained under heavy selling pressure despite the further drop in inter-bank rates as investors worried lenders would respond to the recent cash crunch by curbing lending. China's services sector expanded modestly in June with the vast construction industry dragging on output, surveys showed on Wednesday, in a further sign that the world's second-largest economy is losing momentum. China's central bank allowed short-term borrowing costs to spike to close to 30 percent on June 20, sending a blunt but effective message to overstretched banks that it was determined to bring risky lending under control. Policymakers later issued a flurry of reassurances that there is ample liquidity in the financial system, but the nasty squeeze could be just a preview of greater instability to come if China's leaders push ahead with liberalising interest rates and capital controls, some traders believe. The market was hit by heavy seasonal fund demand last month, particularly from banks which needed more cash to meet regulatory checks and window-dress their deposit totals at the end of the quarter. Most banks will need to set aside additional funds with the central bank on July 5 in order to meet the required reserve ratio (RRR). The amount of additional reserves to be paid that day is based on the increase in each bank's deposits since June 20. But those same banks will likely receive RRR refunds at the next RRR assessment on July 15, since many short-term deposits that flowed into banks at quarter-end will flow out again early this month. Some major lenders will also pay cash dividends to stock investors in the first half of July.
Current Prev close Change
(pct) (bps) 7-day repo 4.2483 4.7592 -51.09 7-day SHIBOR 4.2420 4.7500 -50.80
Note: Repo rate is weighted average.
MARKET DRIVERS - China opens new front in war as yuan speculation distorts export data - China seeks to curb speculative flows without monetary tightening - Markets spin on liquidity switches - Non-bank financing to rise in 2013
DATA POINTS - External liquidity tracker: Collapse in FX purchases hurts liquidity in May http://link.reuters.com/pem75t - Impact of maturing central bank bills and repos GRAPHIC: http://link.reuters.com/pem75t - Chinese government bond curve flattens on liquidity squeeze, growth concerns GRAPHIC: http://link.reuters.com/jyr95t - China's interest-rate swap curve is inverted on severe liquidity squeeze GRAPHIC: http://link.reuters.com/ryr95t - China corporate bond spreads have narrowed slightly GRAPHIC: http://link.reuters.com/bas95t - Hot money tracker: Hot money inflows have returned in 2013, boosting liquidity GRAPHIC: http://link.reuters.com/saz74t
(Editing by Kim Coghill)