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China money rates rise as central bank drains cash, tight conditions likely to persist

[SHANGHAI] China's primary money rates were higher for the week as the central bank drained funds for a second consecutive week, but other rates fell as fiscal expenditure helped to prevent excessively tight conditions.

But the central bank's move to ban the issuance of a form of short-term debt, announced on Thursday, suggests the relatively tight environment may continue as regulators seek to control banking system risk.

The volume-weighted average seven-day repo rate traded in the interbank market, considered the best indicator of general liquidity in China, was 2.9402 per cent, 0.99 basis points higher than the previous day's closing average rate, and up from 2.9344 the previous week.

In contrast, benchmark 14-day repos, which are less frequently traded, eased to 3.8593 per cent by 0730 GMT on Friday from 4.1625 per cent a week earlier. The volume-weighted average 14-day repo rate had reached its highest levels since late March on Wednesday.

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The People's Bank of China (PBOC) drained a net 280 billion yuan (S$57.67 billion) for the week through open market operations, less than the 330 billion yuan drained the previous week.

In a statement last week, the PBOC had said that even after the 330 billion yuan drain, banking system liquidity remained "appropriate" thanks in part to fiscal expenditure.

Firms and other institutions, which pay taxes and fees to the government, must deposit these payments into accounts at designated commercial banks in the form of fiscal deposits.

Such deposits cannot be used by commercial banks and play no role in monetary policy.

However, three times per month, the commercial banks hand over all of these deposits to the PBOC where they become part of its monetary base.

This base money can be either retained in times of excess liquidity, or pushed back into the system in the form of finance ministry spending, deposit auctions and refunds on tax overpayments.

A trader at an asset-management firm in Shanghai said that fiscal expenditure continued to help ensure sufficient liquidity this week.

"Also after the month-end, financial institutions don't hold their cash to (guard against) potential money tightening," he said.

Regulatory moves indicate that deleveraging remains a key priority, and that tight conditions may continue. From Sept 1, the PBOC said financial institutions would be barred from issuing negotiable certificates of deposit (NCD) - a popular short-term debt instrument for smaller banks in the interbank market - with a tenor exceeding one year.

While the immediate market impact was limited - traders said NCDs with shorter maturities saw yields fall on Friday as they responded to relatively ample liquidity conditions rather than regulatory concerns - some analysts advised caution.

"The impact of the new rule on the market is relatively small, but the tightening intention behind it is very clear...this may be the start of a new round of regulatory supervision," Huachuang Securities analysts wrote in a note.

The rolling over of 600 billion yuan of special treasury bonds on Tuesday was seen as a non-event in the market, with no impact on liquidity conditions.

The PBOC bought all 600 billion yuan worth of special treasury bonds issued by the Ministry of Finance on Tuesday.