China's money rates rise on month-end seasonal factors

China's primary money market rates were up slightly for the week driven by seasonal factors, despite the central bank's net injection of funds. 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 2.7855 percent on Friday, around 2 basis points higher than the previous week's closing average rate at 2.7683 percent.
Cash conditions had a slightly tightening bias for the week caused by month-end demand from banks for funds to meet regulatory requirements, a trader at a Chinese bank in Shanghai said, noting the central bank was keen to keep the overall liquidity "not too loose, not too tight".
For the week, the People's Bank of China (PBOC) injected a net 280 billion yuan ($41.50 billion) into the market via its reverse bond repurchase agreements, down from a net injection of 510 billion yuan a week earlier. The weekly net cash injection was lower because 138.5 billion yuan worth of medium-term lending facility (MLF) loans matured on Monday, draining cash out of the market.
The PBOC injected 360 billion yuan of MLF loans earlier this month to offset a total of 357.5 billion yuan MLF loans that matured this month. Some traders said they were not particularly optimistic for cash conditions in early August because large numbers of reverse repos were due to mature. Maturing PBOC reverse bond repurchase agreements will drain 750 billion yuan next week, according to Reuters calculations based on official data. Some market watchers said the PBOC has managed banking system liquidity in July by "cutting the peaks to fill in the valleys".
They noted that the authorities injected funds to ensure liquidity when some temporary and seasonal factors weighed on the market, but kept overall conditions steady because stability and deleveraging in the financial markets were top priorities this year. Larry Hu, head of China economics at Macquarie Securities in Hong Kong, expected liquidity conditions to improve in the second half of this year.
While economic growth was likely to slow, a mix of "deteriorating fundamentals with improved liquidity would benefit onshore China, including 'A' shares and bonds". The Shanghai Interbank Offered Rate (SHIBOR) for the seven-day tenor rose to 2.8770 percent on Friday, 3 basis points higher than the last Friday's fix. The spread of the five-year credit default swap rate on Chinese sovereign debt fell 3.09 percent to 63.59 on Friday.