SHANGHAI: China's short-term lending rates surged on Thursday as rising cash calls ahead of the most important Chinese holiday, the Spring Festival, offset a large cash injection by the People's Bank of China into the money market, traders said.
The festival, or the Lunar New Year, falls on Jan. 23. this year during which markets will be closed for a week. Funds are usually tight ahead of this period when firms pay staff annual bonuses and shoppers withdraw money for the celebrations.
Thursday was also one of the three days in a month that the PBOC adjusts reserve requirements paid by banks based on their latest deposits. That added to a liquidity crunch, traders said.
"Many banks have to pay more reserve requirements today as they had rushed to attract more deposits at the end of last year to window dress their balance sheets," said a trader at a Chinese commercial bank in Shanghai.
"Overall, it is not difficult to borrow money today, although costs are dear. Liquidity conditions are expected to remain relatively tight until the holiday."
The benchmark weighted-average seven-day bond repurchase rate rose 41 basis points to 4.4874 percent by midday from 4.0760 percent at Wednesday's close.
Trading volume in the contract rose to 82 billion yuan ($13 billion) on Thursday morning from 73 billion yuan on Wednesday, reflecting strong demand, traders said.
The shortest overnight repo rate jumped to 4.0039 percent from 3.5009 percent, while the 14-day repo rose to 4.9260 percent from 4.7516 percent.
The PBOC did not conduct open market operations on Thursday, meaning it will inject a net 51 billion yuan into the market this week via maturing central bank bills and repos.
Last week, the central bank conducted a net injection of 9 billion yuan into the market as it was aimed at helping the market weather a liquidity squeeze ahead of the long holiday.
BANK RESERVE CUT AHEAD?
The government is widely expected to relax its tight money policy this year as China's economic growth slows in line with global weakness, caused mainly by the euro zone debt crisis.
Market players have been forecasting a cut in banks' reserve requirement ratios (RRR) by the central bank since mid-December.
A Reuters poll published on Thursday showed 80 percent of 23 banks and other financial institutions participating in the survey believed the central bank would cut RRR once in January, while 65 percent even expected RRR could be cut twice in the month.
However, none of them expected the PBOC to cut official benchmark interest rates in January, citing still high inflation, according to the poll.
Reflecting the view, China's interest rate swaps were almost unchanged on Thursday, with the benchmark five-year IRS edging up 2 basis points to 2.92 percent.
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