SHANGHAI: China's benchmark money rate dropped slightly on Monday but remained near a four-month high hit late last week as banks were setting aside extra reserves for rising deposits, traders said.
Institutions are also preparing money for a nearly $650 million initial public offering (IPO) of stock, which traders said later this week could briefly freeze a few hundreds of billion yuan of subscription funds.
Traders said they expected the temporary money market squeeze to last well into July and that the People's Bank of China (PBOC) was likely to inject liquidity via open market operations and possibly a bank reserve ratio cut.
"The money market crunch is the worst since February," said a trader at a major Chinese state-owned bank in Beijing.
"In addition to temporary factors such as reserve payments and the IPO, less capital inflows into China this year are a major and more permanent factor," she said.
The benchmark seven-day weighted bond repurchase rate was trading at 4.1730 percent, down only slightly from a four-month high of 4.3392 percent at Thursday's close. The market was closed on Friday for a public holiday.
The 14-day rate jumped to 4.7384 percent from Thursday's 4.0702 percent, reflecting market expectations that liquidity conditions will remain tight well into July.
Chinese banks are required to adjust their deposit reserves on the 5th, 15th and 25th of each month. They also need more money to meet regulatory requirements, such as a loan-to-deposit ratio, by the end of the half of a year.
Traders reported banks' deposits had recently rose sharply as all banks tried hard to attract move savers to make their half-year financial books look better. This would also add a burden to their reserve payments on July 5, they said.
LARGE-SCALE IPO
CITIC Heavy Industries Co, China's fourth-biggest maker of heavy machinery, is launching a 4.13 billion yuan ($648.85 million) IPO on the Shanghai Stock Exchange, which will open to institutional and retail subscriptions this week.
If successful, it will be the second-largest A-share IPO in Shanghai this year, behind a 5 billion yuan offering by China Communications Construction in February.
China's IPOs typically attract huge amounts of subscription funds because IPOs often jump on their listing debut days, with punters speculating heavily in newcomers. As a result, large-scale offerings frequently cause short-term volatility in the country's money market.
The People's Bank of China reported last week that it and Chinese financial institutions, including the central bank itself, bought a net 23.4 billion yuan worth of foreign exchange in May, following a net sale of 60.6 billion yuan in April.
In the first five months of 2012, monthly net forex purchases averaged just 50.7 billion yuan, down sharply from 2011's average of 231.6 billion yuan a month and 2010's monthly average of 272.4 billion yuan.
The PBOC's purchases of forex inflows, mainly used to help keep the Chinese currency stable, used to be the single biggest channel through which the central bank injected base money into the banking system.
With such inflows slowing sharply, the PBOC must now rely on cuts in banks' reserve requirement ratios (RRR) to help keep appropriate base money supply to support economic growth.
Traders say the central bank is likely to take action over the next several weeks to inject liquidity into the market, either through a cut in RRR, or through open market operations, or both.
Already last week, the PBOC injected a net 55 bln yuan into the market through normal open market operations, its largest net injection since April.
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