China money market rates spike – don’t panic yet
A spike in China money market rates has sent jitters through global markets, but experts say they don't expect a repeat of June's cash crunch as the world's second biggest economy seeks to maintain stability ahead of a key policy meeting.
The seven-day repo rate, which is seen as gauge of confidence to lend in the interbank market, opened at a fresh three-month high of 5 percent on Thursday from a close of 4.05 percent on Wednesday.
The People's Bank of China's (PBOC) decision to abstain from injecting liquidity on Tuesday has given rise to concerns over possible monetary tightening in the world's second largest economy. It was the second time since last week that the central bank did not inject liquidity.
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The PBOC typically conducts bi-weekly reverse-repurchase operations on Tuesday and Thursday. As of 11:15 local time on Thursday, the central bank had not conducted a reverse-repo operation.
According to Yii Hui Wong, rates and foreign exchange strategist at BNP Paribas the rise in money market rates is seasonal in nature, and is not a prelude to policy tightening.
"Corporate tax payments are coming up in October – this reflects money going out of the system," Wong said. "Also, the PBOC's decision to not do any reverse repos on Tuesday is because there's been quite a lot of capital inflows - when this increases they pull back on reverse repos as a way to manage liquidity," she said.
Wong doesn't expect a replay of the severe liquidity strain seen in June when the seven-day repo rate rose to a record high above 10 percent and the overnight repo rate jumped as high as 30 percent.
"The November [policy] meeting is coming up – it is very likely that rates will be stable rather than unstable. For reforms to happen you need a stable environment and no uncertainty around liquidity," she said. Next month, China's Community Party is set to hold a key meeting on economic policy to establish a roadmap for reforms over the next few years.
Additionally, with growth in the economy picking up in the third quarter, it is unlikely the government will want to derail the momentum, she added.
Viktor Shvets, head of strategy research, Asia at Macquarie said the PBOC has learned a valuable lesson from the liquidity crunch earlier this year.
"I don't expect to see anything like June. Clearly now, there's a struggle within Beijing on how much do we emphasize restructuring, how much do we emphasize liquidity, how much do we emphasize asset bubbles," Shvets said. "[These are] the same problem problems you find everywhere else. It's exactly the same issues in U.S., euro zone, [and] Japan. I don't think China is that dramatically different."
Ed Ponsi, managing director at Barchetta Capital Management believes markets are overreacting to the jump in money market rates.
"Ever since we had the regime change, I think there's been a little bit more transparency. I think it's way too early to panic, if things progress I think we can become concerned but I'm not very concerned about China right now," he said.
—By CNBC's Ansuya Harjani; Follow her on Twitter