SHANGHAI: China's major money rates were mixed on Tuesday after the central bank injected fresh funds into a market that remains under pressure from seasonal factors and policy fears.
The weighted-average benchmark seven-day repo was flat at 4.95 percent by mid-morning in light trade given the weak supply of that tenor in the week immediately prior to the long Lunar New Year holiday. However, trade in 14-day repos, which will not mature until well after markets reopen, was vigourous.
"The 14-day repo price is a real market price, while the seven-day repo price is only really effective for the next two days before markets close," said a dealer at a commercial bank in Shanghai, saying that bankers were therefore largely unwilling to lend using seven-day contracts.
The 14-day repo traded as high as 8 percent on Monday, the highest intraday quote since a squeeze in late December, and the weighted average for the tenor has been on a sharp rise since mid-January, hitting an intra-month high of 6.93 percent on Friday before sliding back to 6.72 percent on Tuesday.
Primary short-term repo rates showed signs of spiking the previous week after the People's Bank of China (PBOC) abstained from injecting any funds for seven consecutive sessions of open market operations, leading bankers to hoard cash in order to have sufficient reserves to last through the upcoming holiday week.
But the central bank moved to head off a more dramatic squeeze by injecting 375 billion yuan ($62 billion) through a mixture of repos that week, adding another 150 billion yuan to the pot on Tuesday, more than offsetting the impact of a 75 billion yuan drain this week. Market watchers remain on edge given the tendency of stock and bond markets to react to rises in short-term rates in the past.
Some media circulated reports about banks freezing foreign exchange transactions and the PBOC putting systems under maintenance toward the end of the week for maintenance, suggesting these indicated more systemic tightness, but which money dealers pointed out happen every year during the holiday.
LONG-TERM CONCERNS
Dealers believe that the end of the holiday is likely to see continued upward pressure on rates, part of the "new normal" environment engineered by the central bank which intends to use higher rates in the interbank market to pressure banks and corporates to deleverage.
Money and bond markets are building in expectations of pricier money, with one-year interest-rate swaps for the seven-day repo at 4.81 percent and treasury bond curves showing a steady rise since June, when the PBOC began its crackdown on shadow banking.
However, data shows that traders are still betting that the central bank will not adjust the benchmark deposit rate, still held at 3 percent, which some economists argue would be the best way to attack shadow banking as it would make traditional deposits more attractive than higher-yielding wealth-management products.
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