SHANGHAI, Sept 27: Fears that China could see a repetition of June’s dramatic cash crunch were relieved at last this week as targeted injections by the central bank kept money supply comfortable in the run-up to a long holiday and the end of the quarter.
The most commonly traded short-term rates slid over the course of the week as the People’s Bank of China (PBOC) steadily injected fresh cash into money markets through short-term reverse repo agreements.
The benchmarket seven-day repo contract and the overnight repo rate both traded around 3 percent on Friday, which traders say indicates generally accommodative conditions.
However, traders pointed out that demand remained relatively stronger for longer tenors that would mature after the end of the Golden Week holiday, in particular 14- and 21-day tenors.
At the same time, the bank continued to follow its recent habit of sterilising cash coming into the system through maturing long-term bills by immediately reissuing fresh bills of the same tenor and similar amounts.
The net effect was 150.1 billion yuan ($24.52 billion)pouring into the banking system this week, evidently sufficient to tide most customers over through the upcoming holiday beginning Oct 1, which will see markets close through Oct 7.
The PBOC led off with a strong signal on Tuesday, when it issued 88 billion yuan of short-term reverse repos, which traders said established confidence that no crunch was in the offing.
Credit data for August released last week showed that total social financing — the broadest measure of credit flows to the real economy — nearly doubled in August from July.
Some observers interpreted looser liquidity in August as a sign that authorities had quietly opened the credit tap after the June liquidity crunch to ensure that the economy’s slowdown would not be too sharp in the run-up to a top-level government meeting on economic reform in November.
SHORT TERM RATES:
Instrument RIC Rate* Change
(weekly,
Bps)**
1-day repo CN1DRP=CFXS 3.0195 -44.27
7-day repo CN7DRP=CFXS 3.6396 -19.14
7-day SHIBOR SHICNYSWD= 3.494 -10.30
*The volume-weighted average price (Vwap) at midday Friday ** Compared to the Vwap at market close the previous Friday
KEY INTEREST RATE SWAPS:
Instrument RIC Rate Spread (bps)
2 yr IRS based on 1 CNABAD2YF= 2.915 9*
Year benchmark
5 yr 7-day repo swap CNYQB7R5Y= 4.13 -113
1 yr 7-day repo swap CNYQB7R1Y= 3.97 -97
*This spread can be seen as a proxy for forward-looking market expectations of an interest rate cut or rise. GOVERNMENT BOND FUTURES
Instrument RIC Rate Change
(weekly, bps)
Dec 2013 5 yr CTFZ3 94.42 31.89
Mar 2014 5 yr CTFH4 94.50 28.88
Jun 2014 5 yr CTFM4 94.53 27.31
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MARKET DRIVERS
– 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 ($1 = 6.1214 Chinese yuan)
(AGENCIES)
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