China money rates fall, but taxes, reserve requirements loom

[SHANGHAI] China's primary money rates fell on Friday after the country's central bank injections cash into money markets, but traders said conditions may turn tighter next week as banks work to meet tax obligations and reserve requirements.

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 2.746 per cent, nearly 6 basis points lower that the previous day's closing average rate.

On Friday, the People's Bank of China (PBOC) injected 100 million yuan into money markets through seven-day reverse bond repurchase agreements. Traders said the injection helped to compensate for the 280 billion yuan of reverse repos maturing this week.

For the week, the PBOC drained a net 70 billion yuan compared with a net drain of 250 billion yuan a week earlier.

"Money market liquidity is fine, but it's important to consider banks' tax payments and reserve requirement contributions next week," said David Qu, market economist at ANZ in Shanghai.

With these factors set to drain between 800 billion and one trillion yuan from the markets next week, the PBOC wants to inject money first, he said.

On Tuesday, the PBOC resumed open market operations after a 12-session hiatus during which it had cited "relatively high" or "appropriate" liquidity levels in the banking system.

Traders also pointed to an ongoing National Financial Work Conference as a factor contributing to that relatively loose liquidity. The five-yearly meeting, which ends Saturday, will cover topics including financial regulatory reforms and financial safety.

"We think the PBOC would maintain a loose atmosphere before and during the meeting, until new policies are made. Then we expect tightening," said a Shanghai-based trader.

The seven-day Shanghai Interbank Offered Rate (Shibor) fell to 2.803 per cent on Friday, down 1.5 basis points from the previous close, but up 1.7 basis points from last Friday's close.

The one-day or overnight rate stood at 2.603 per cent, down nearly two basis points from last Friday, and the 14-day repo stood at 3.441 per cent, up more than four basis points from last Friday's close.

The spread of the five-year credit default swap rate on Chinese sovereign debt fell 8.4 per cent from last Friday's close, to 66.92.

REUTERS