China's money rate down, but Hong Kong borrowing cost up

[SHANGHAI] China's primary money rates fell on Wednesday as seasonal factors faded after the holiday, but offshore borrowing cost largely rose amid a shrinking yuan pool in Hong Kong and a reduction in capital outflows from mainland.

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 2.2895 per cent as of midday, more than 30 basis points lower than the previous week's closing average rate.

Pressure on money rate from year-end holiday factors have faded and liquidity situations were balanced, even with a slight loosening bias on Wednesday, traders said. But they don't expect such conditions to last as the Chinese New Year is approaching.

"The market has little stress now, but I am not quite optimistic about liquidity conditions in the next few weeks," said a trader at a Chinese bank.

"The peak season for cash demand is coming."

Institutions will raise provisions as early as next week to meet cash demand from households and companies, who will shore up their own positions ahead of the Chinese New Year holiday, which starts in late January.

Traders said the central bank had adopted a tight liquidity stance since the second half of 2016 to curb asset price bubbles and to reducing leverage in the banking system. The central bank now uses open market operations to flexibly manage short-term funds in the system.

The People's Bank of China drained a net 295 billion yuan (S$61.49 billion) from the money market through open market operations so far this week. The cash drain followed a net 245 billion yuan drain last week.

However, the liquidity situation in Hong Kong tightened this week with the overnight yuan borrowing rate climbing on Tuesday to its highest level in more than three months.

The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor) for overnight tenor, set by the city's Treasury Markets Association (TMA), was fixed at 16.95 per cent on Wednesday. The rate was fixed at 17.76 per cent a day earlier, the highest since Sept 19.

Analysts said the surge in the borrowing cost was a result of a shrinking yuan pool in Hong Kong as fewer people are seeking yuan-denominated assets as the currency is expected to weaken further.

"The depreciation expectation of the yuan remains and it takes time for investors to rebuild their confidence in the Chinese currency. Meanwhile, China has been making efforts to control capital outflows," said Liao Qun, China chief economist at Citic Bank International, adding he expects the pressure on the liquidity would remain in the near future.

The Chinese authorities rolled out policies over the past two months to tighten its grip on cross-border cash flow overseas after the yuan slid to an 8-1/2 year lows.

Separately, Ken Cheung, Asian FX strategist at Mizuho Bank in Hong Kong said the liquidity squeeze in offshore yuan and a firmer than expected onshore spot yuan guidance rate suggested that the PBOC "might have stepped up its action to defend the yuan" ahead of the US President-Elect Donald Trump's inauguration on Jan 20.

Mr Trump has accused China in the past of keeping the yuan weak in order to gain trade advantages.

REUTERS