China money rates fall

China's primary money rates are lower this week amid relatively loose cash conditions, but longer-term rates suggest tighter liquidity as the central bank maintains its policy stance, and as mid-year tax payments approach. The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.6907 percent. That is 1.4 basis points lower than the previous week's closing average rate of 2.7047 percent.
The Shanghai Interbank Offered Rate (SHIBOR) for same tenor fell to 2.7130 percent, or 9.3 basis points lower than the previous week's close of 2.8060 percent. The one-day or overnight rate stood at 2.4509 percent and the 14-day repo stood at 3.1382 percent.
Market watchers and participants said that overall market liquidity has been ample in the weeks following a reduction in banks' reserve requirement ratio (RRR), which took effect on April 25.
A reduction in cash demand following a month-end peak has also helped to nudge rates lower, despite the People's Bank of China (PBOC) draining a net 140 billion yuan from markets for the week, the third consecutive week of drains.
However, longer-term rates have been edging higher, pointing to expectations of tigther conditions as mid-year tax payments approach, and as the central bank keeps its policy stance unchanged.
"After the RRR cut, the central bank's tightening operations have helped to correct expectations of a shift in monetary policy," Huachuang Securities analysts wrote in a note. Factors including banks bringing wealth management products back onto their balance sheets will force the PBOC to continue "appropriately" reducing reserve requirements, the analysts said. "But at the same time, the central bank will manage overall liquidity through controlling other open market operation tools, and maintain stable monetary policy."
A trader at a regional bank in Shanghai said that trade had been "difficult" in the weeks since the RRR cut.
"Liquidity is relaxed, but rates on negotiable certificates of deposit (NCD) have been steadily moving upward, and after all it's almost the middle of the year," she said. "If you want to look at how banks are preparing to enter the second half, you should look at three-month NCD rates."
The yield on three-month AAA-rated NCDs had risen 45 basis points since April 25 to 4.15 percent on Thursday, the most recent day for which there is data. That was its highest level since March 23. The three-month SHIBOR stood at 4.0340 on Friday, up 5 basis points since the RRR cut on April 25.