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China's primary money rates rise after previous week's multi-year lows

Drains from corporate tax payments and maturing medium-term loans offset fresh liquidity injections and cash released by reserve requirement cut


CHINA'S primary money rates rose on Tuesday after the previous week's multi-year lows, as drains from corporate tax payments and maturing medium-term loans offset fresh liquidity injections and cash released by a reserve requirement cut.

The People's Bank of China (PBOC) announced on Jan 4 that it would cut banks' reserve requirement ratios (RRRs), the amount of cash that they must hold as reserves, by 100 basis points in two stages. The cut will release a net 800 billion yuan (S$160 billion) in liquidity after banks pay back maturing medium-term loans.

The first 50-basis-point cut came on Tuesday. In addition, the PBOC injected a total of 180 billion yuan into the market through reverse repurchase agreements.

The second stage of the RRR cut will take effect on Jan 25.

While no reverse repos matured on Tuesday, 390 billion yuan worth of one-year medium-term lending facility (MLF) loans were set to expire.

Traders said the maturing MLFs limited the impact of the combination of open-market injections and cash released by the RRR cut.

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 2.6419 per cent on Tuesday afternoon.

That is 9.73 basis points higher than the previous day's closing average rate, and up from 2.2131 per cent on Jan 8, which was its lowest level in more than 3-1/2 years.

The Shanghai Interbank Offered Rate (SHIBOR) for the same tenor rose to 2.6520 per cent on Tuesday, up 2.30 basis points from the previous close, and up from 2.3720 per cent on Jan 8. The one-day, or overnight, rate stood at 2.2453 per cent and the 14-day repo stood at 2.5411 per cent.

In a statement on Tuesday, the PBOC said the 180 billion yuan reverse repo operation and the RRR cut were intended to "maintain relatively ample banking system liquidity", noting that the market has entered a peak tax-payment period. The bank said that it expects system liquidity to decrease rapidly in the coming days.

In addition to the squeeze from regular corporate tax payments, cash demand from households and companies typically spikes ahead of the Chinese New Year holiday, which falls in early February this year.

"We believe the liquidity environment still faces some negative factors, including cash withdrawal pressure on banks, seasonal tax payment... and FX outflow," Gao Ting, head of China Strategy at UBS Securities said in a note. "We think the (PBOC) may still use a variety of short-term tools to adjust liquidity to avoid large fluctuations before the Chinese New Year."

Mr Gao said he expected the seven-day repo rate to rise to around 2.6 per cent to 2.8 per cent ahead of the Chinese New Year holiday. REUTERS