China money rates climb despite central bank injections as holiday cash binge begins

SHANGHAI: China's money rates spiked this week as banks hoarded cash in preparation for the long Lunar New Year festival, but traders believe the increase is largely seasonal and is being tempered by massive injections by the central bank.

With the country's stock markets in turmoil and economic growth at 25-year lows, the central bank is more anxious than ever to avoid any cash crunch over the holiday, and has injected the most liquidity via open market operations since January 2014.

Central bank economist Ma Jun suggested in an interview on Thursday that the People's Bank of China (PBOC) might begin relying on direct injections into the money market to maintain holiday liquidity instead of cutting bank reserve requirement ratios (RRR), which would free up more money for banks to lend.

That will likely disappoint traders and stock investors who have been hoping for the sort of long-term system-wide cash injection and potential economic boost that an RRR cut would bring.

While the volume-weighted average rate of the benchmark interbank seven-day repurchase (repo) agreement, considered the best indicator of general liquidity in China, was steady for the week at 2.3245 percent, most other benchmark money rates were up sharply, reflecting high demand for cash.

Some analysts said the rise may also indicate an increase in capital flowing out of the country, which is being closely watched by the government and central bank.

The one-day or overnight rate rose nine basis points (bps) on the week to 2.0275 percent, while the 14-day repo surged 105 bps to 3.6988 percent. The one-month repo was up 45 bps to 3.39 percent.

But economists and traders said the mood was calm, with most market participants attributing the rise in rates mainly to normal seasonal cash demand ahead of the holiday.

"It is due to several factors which happened to occur at the same time," said a trader at a commercial bank in Shanghai.

"Money demand surged ahead of the Spring Festival, and it was also the time for tax payments. The decline of the forex position also weighed. But liquidity slightly eased today.

WHO SAID THIS? Though the rates are still high, the volume of money appeared to be more than earlier this week."

"Overall if you look at China's balance of payments it still runs a surplus," said Liu Li-Gang, Chief Greater China Economist at ANZ Bank in Hong Kong.

"So I think we should not overplay the capital flight angle at this time. Seasonality is definitely a more important factor."

Concerns about slowing growth in China and accelerating outflows have unnerved global markets, contributing to a sharp sell-off in the opening weeks of 2016.