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China money rates fall as IPO funds unfreeze, fiscal deposits flow in

China's money market rates slid this week as funds locked up for IPO share subscriptions were unfrozen and the Ministry of Finance injected liquidity into the market via an opaque policy tool known as fiscal deposits, traders said.

Market sentiment also improved after reports said that the People's Bank of China (PBOC) plans to include interbank lending by non-bank financial institutions as part of the calculated deposit base, which will expand the base for calculating loan-to-deposit ratios.

By midday, the weighted average of the benchmark seven-day repo rate had fallen 122 basis points from last Friday's close to 4.71 percent.

The active 14-day rate, dropped 96 basis points from December 19's close to 5.43 percent, while the one-day rate fell 32 basis points.

"Liquidity is much better this week, as IPO money comes back and fiscal deposits have been poured into the banking system," said a dealer at a Chinese commercial bank in Shanghai.

About 10 initial public offerings (IPOs) launched in the Shanghai and Shenzhen stock exchanges were opened to investor subscriptions last week and this week, together locking up around 1.6 trillion yuan ($258 billion) for a few days before the money began to be released, starting Wednesday. The finance ministry typically redistributes a large amount of taxes collected from firms in December via the form of fiscal deposits, which typically help ease the year-end liquidity pressure in the money market.


Among other local media reports, the China Business News said on Wednesday that the PBOC had convened a meeting of 24 financial institutions, telling them that even if interbank assets are included in the deposit base, they may not need to set aside additional reserves, leaving more liquidity available for lending and investment.

Central bank officials have declined to comment. "The reports made the market believe that the typical end-year liquidity crunch in money market will be over soon and that money market rates will drop further in coming weeks," said a trader at a European bank in Shanghai.

Traders, however, pointed out that if the reports were proven true, the central bank would be less likely to cut banks' reserve requirement ratio (RJR) in the near term -a previously much anticipated move as Beijing is easing its monetary policy to support its slowing economy.

Among a slew of economy-boosting steps, the PBOC told Chinese banks to lend more in the final months of 2014 and relaxed enforcement of loan-to-deposit ratios.

These steps have made it less necessary for the central bank to resort to its traditional open market operations to inject funds into the market, with the PBOC has skipping its weekly operations since late November.

Copyright Reuters, 2014


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