China money rates tumble as cash squeeze wanes; markets jittery about Spring Festival

Lu Jianxin and Gabriel Wildau
Friday, 27 Dec 2013 | 1:22 AM ET


* Liquidity improves as fiscal deposits flow into markets

* C.bank has sent clear signal of tight liquidity stance

* Periodic squeezes expected, next could be in late Jan

* Traders see 7-day repo rate at 5-6 pct through early Feb

SHANGHAI, Dec 27 (Reuters) - China's money market rates mostly slumped this week, as government funds entering the commercial banking system helped relieve a liquidity squeeze that peaked last Friday and Monday, traders said. China's benchmark money market rate, the seven-day bond repurchase rate, was at 5.09 percent on a weighted-average basis by midday on Friday, tumbling 312 basis points from the end of last week. The overnight repo slumped 146 bps to 3.45 percent, while the 14-day repo dropped 139 bps to 6.01 percent. The Ministry of Finance typically hands out tax refunds to companies around the end of the year and spends money in the form of subsidies and year-end events. Those payments boost liquidity in the interbank market as so-called fiscal deposits flow from the central bank into commercial banks.

In recent years the ministry has injected more than 1 trillion yuan ($165 billion) of liquidity into the market via the fiscal deposits each December. A delay in the inflow of fiscal deposits this year contributed to the recent cash crunch. Traders said the flow began belatedly this week, however, and they expect this year's total will ultimately be similar to recent years.

TIGHT STANCE The market's reliance on fiscal deposits was especially acute this year, as the People's Bank of China (PBOC) refused to inject large amounts of money to help satisfy banks' elevated cash demand at the end of the year. The PBOC added a modest 29 billion yuan via open market operations on Tuesday but conducted no injection on Thursday, sending a clear signal to banks that they need to reduce leverage and improve cash management, traders said.

The PBOC's relatively tight stance reflects worries about consumer inflation at home and stubbornly fast growth in the red-hot property market. The recent rate spike marked the second time in six months that the central bank engineered a cash crunch. An even more severe squeeze in June set off a panic in financial markets globally. "Twice bitten, the markets have gotten a clear signal that they have to deleverage their business to better manage their cash flows, instead of relying on the PBOC's help," said a trader at a Chinese commercial bank in Shanghai. "The central bank is not expected to change its pro-tight liquidity stance any time soon, so while it takes time for banks to actually carry out deleveraging, periodic market squeezes will continue in coming months." Demand for cash often spikes at the end of the quarter, and especially at the end of the half year and year's end, as banks try to attract extra deposits to dress up their quarterly financial statements and stay below the regulatory 75 percent loan-to-deposit ratio. Major holidays also play an important role. China's 2014 Spring Festival, or Lunar New Year, will begin on Jan. 31. Traders expect the seven-day repo rate to remain elevated at 5 to 6 percent through early February, compared with the 3 to 4 percent level where it has mostly moved this year. That rate has the potential to jump even higher in late January ahead of the most important Chinese holiday. Bucking the overall downward trend in rates, the two-month repo rate jumped to 6.88 percent on a weighted-average basis by midday on Friday, up from 6.41 percent at the end of last week, reflecting strong demand for funds during the Spring Festival period.


Instrument RIC Rate* Change (weekly,


1-day repo 3.4459 -146 7-day repo 5.0897 -312 14-day repo 6.0114 -139 7-day SHIBOR 5.0670 -258

*The volume-weighted average price (VWAP) at midday Friday

** Compared to the VWAP at market close the previous Friday


Instrument RIC Rate Spread (bps)* 2 yr IRS based on 1 3.009 9

year benchmark

5 yr 7-day repo swap 5.04 204 1 yr 7-day repo swap 4.77 177 *This spread can be seen as a proxy for forward-looking market

expectations of an interest rate cut or rise.


Instrument RIC Price Change

(weekly, pct)

Mar 2014 5 yr 91.474 -0.22 Jun 2014 5 yr 92.020 +0.17 Sep 2014 5 yr 92.454 +0.35


MARKET DRIVERS - CHINA MONEY-PBOC hopes to drain sloppy money without raising primary rates as growth revives - Govt bond futures market to start with a whimper, not a bang - In wake of cash crunch, PBOC commits to transparency but quietly tightens grip - CHINA MONEY-Tighter interbank regulation seen after cash squeeze - Collapse in China bond volumes exposes market's seamy side

DATA POINTS - External liquidity tracker: Rise in fiscal deposits slams liquidity in July http://link.reuters.com/pem75t - Impact of maturing central bank bills and repos GRAPHIC: http://link.reuters.com/pem75t - Chinese government bond curve steepens as growth fears ease GRAPHIC: http://link.reuters.com/jyr95t - China's interest-rate swap curve steepens as growth prospects improve GRAPHIC: http://link.reuters.com/ryr95t - China corporate bond spreads narrowed on improving growth outlook GRAPHIC: http://link.reuters.com/bas95t - Hot money tracker: Hot money outflows reached record high in July GRAPHIC: http://link.reuters.com/saz74t


(Editing by Jacqueline Wong)