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China money rates rise sharply as mini-crunch anniversary approaches

[SHANGHAI] China's money rates surged on Thursday afternoon, with the weighted average for the benchmark seven-day repo contract quoted at up to 8.5 percent, the highest level since January.

The rise follows another week of relative passivity by the People's Bank of China in the interbank market, where the bank neither drained nor injected funds. It has sat on the sidelines during biweekly open market operations for seven straight sessions.

The 8.5 per cent quote was 447 basis points higher than Wednesday's closing quote. While it was an outlying quote, that level suggests China risks a repeat of last December's mini-money crunch. The volume weighted average price (VWAP) for that instrument approached 9 per cent on Dec 23, 2013. "The PBOC removed 250 billion yuan of liquidity from the market yesterday by only rolling half of the 500 billion yuan of MLF (medium-term loan facility) quota extended to the five large state-owned banks in September," Oliver Barron of investment bank NSBO wrote in a research note on Thursday. "If interbank rates remain high throughout the day, some form of liquidity injection looks likely," he wrote, adding that the central bank might issue more backdoor liquidity injections to selected banks, as it has in the past.

The seven-day repo's VWAP is generally considered most representative of general liquidity conditions in China. It stood at 5.17 per cent in mid-afternoon, after breaking above 4 percent earlier Thursday. Other commonly traded tenors such as the overnight repo and the 14-day repo also rose.

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The seven-day Shanghai Interbank Offered Rate (SHIBOR) also crossed 4 per cent, the highest rate it has posted since July.

Traders are seeing increasingly intense pressure on liquidity toward year-end, driven by cash demand from companies to meet regulatory and tax payments, and by speculators wanting cash for coming initial public offerings (IPOs).

Regulators have made attempts to ease conditions, with sources reporting that the central bank is extending medium-term liquidity facilities to selected banks. Fiscal deposits are flowing back into the money supply as well, but that hasn't kept rates from rising rapidly.

IPOs are particularly seductive for investors, given consistent double- and triple-digit returns since they resumed this year. Institutions have frequently tapped the short-term money market to participate, putting upward pressure on rates.

Such short-term pressure does not directly translate into higher long-term rates. But it isn't helpful as Beijing keeps trying to get banks to extend longer-term loans for productive investment instead of sticking to short-duration rollover credit that helps struggling companies survive without doing much for growth.