SHANGHAI, Dec 19: China’s money market rates jumped this week, as tight liquidity has been exacerbated by demand for funds to invest in stock IPOs, though measures taken by Beijing to maintain sufficient cash has prevented an outright crunch.
In another step that bolstered its easing bias, the People’s Bank of China (PBOC) this week issued short-term and medium-term funds to local banks to ease liquidity strains via backdoor policy tools, although those moves are not yet reflected in rates.
While the exact amounts of money injected by the PBOC are not known to the market, the Ministry of Finance auctioned 60 billion yuan ($9.68 billion) of its deposits to commercial banks on Thursday to further boost market liquidity.
‘There is huge demand in the market, with IPO subscriptions adding to the end-year factors,’ said a trader at a Chinese commercial bank in Shanghai. ‘But continuous regulatory liquidity injections have helped soothe market sentiment, with everybody believing the shortage will be over soon.’
The weighted average of the benchmark seven-day repo rate was up a whopping 217 basis points to 5.91 percent by midday compared with the close last Friday, after it was quoted at up to 8.5 percent in intraday trading on Thursday, the highest level since January.
Another active contract, the 14-day rate, jumped 199 basis points from Dec. 12’s close at 6.33 percent after it hit an intraday high of 9 percent in early trade on Friday, also the highest level since January.
BACKDOOR INJECTIONS
Traders are seeing increasingly intense pressure on liquidity toward year-end, driven by cash demand from companies to meet regulatory and tax payments. In addition, 12 initial public offerings are being launched on the Shanghai and Shenzhen stock exchanges this week and next, with traders estimating these will tie up to 1.5 trillion yuan of subscription money for a few days. ‘While IPOs are a new factor this year, money rates have not exceeded the levels at the same time last year, with regulatory monetary easing stance serving as a soothing factor,’ said a dealer at an Asian bank in Shanghai ‘However, much money injected this year has used backdoor channels,’ he added.
For instance, the PBOC pumped a combined 769.5 billion yuan worth of three-month loans into banks via a new tool known as the medium-term lending facility (MLF) in the third quarter, but the injections were announced only in November. The finance ministry is pouring more than 1 trillion yuan into the system via another opaque tool, fiscal deposits, in December, mostly late in the month.
The PBOC also unexpectedly cut official interest rates in November, signalling a reversal of Beijing’s tight liquidity stance adopted from June 2013 to January 2014, when it was clamping on a bulging shadow banking sector. The central bank has also told Chinese banks to lend more in the final months of 2014 and relaxed enforcement of loan-to-deposit ratios to expand credit as Beijing takes a slew of steps to curb a sharp slowdown of the world’s second-largest economy.
(AGENCIES)
Follow our WhatsApp channel