China's short-term borrowing rates climbed on Friday, with the benchmark seven-day repo rate up 25 basis points, as firms prepared to use bank deposits to make annual tax payments, traders said. Cash flows in the Shanghai-based money market were also trimmed after banks on Thursday increased reserve deposits with the central bank to meet ratio requirements following an increase in total deposits in the first quarter.
Traders said there was reasonable liquidity, however, with smaller banks seen borrowing actively while major banks continued normal lending. Market participants expect short-term funding costs to drop this year, as the People's Bank of China (PBOC) is seen keeping monetary policy largely neutral compared with its tight strategy for most of last year.
"Money rates are likely to fall this year, although factors such as corporate tax payments will cap the scope of any downside in the near term," said a dealer at an Asian bank in Shanghai.
"Overall, the monetary policy environment will be much easier this year compared with last year." The weighted-average seven-day bond repurchase rate rose to 4.2421 percent from 3.9886 at Thursday's close. The overnight repo rate gained to 3.2509 percent from 3.0290 percent, and the 14-day rate advanced to 4.3063 percent from 4.0579 percent.
Chinese firms pay initial corporate income tax each month but balance their quarterly and annual taxes during a subsequent grace period. Annual tax payments for the previous year are typically balanced in April.
At the same time, Chinese banks usually try to attract more deposits at the end of each quarter to window dress their quarterly statements. While banks must adjust their reserve deposits based on their current deposit totals on the 5th, 15th and 25th of each month, they are typically forced to increase their reserve deposits at the PBOC on the first 5th after the end of a quarter.
Most Chinese interest rate swaps were unchanged at mid-session, with the lack of any prospects for a rate cut in the near term encouraging players to stick to defensive strategies, traders said.
Benchmark five-year IRS were flat at 3.35 percent, and one-year IRS were at 3.12 percent.