China IRS, money rates fall; RRR rise fears ease

SHANGHAI: China's interest rate swaps and money market rates fell across the board on Tuesday as tight liquidity conditions helped ease jitters over potentially another rise in bank requirement reserve ratio (RRR) this month.

The People's Bank of China is poised to conduct a net drain of money from the market via its open market operations this week after it injected funds over the previous eight weeks, a move traders said might herald a pause in RRR hikes for now.

The central bank drained 99 billion yuan ($15.3 billion) via 28-day bond repurchase agreements and 11 billion yuan via one-year bills on Tuesday, compared with a total of 125 billion yuan in maturing PBOC bills and repos this week. It will conduct another regular open market operation on Thursday.

The PBOC has raised RRR every month in a new cycle of monetary tightening since last October, while it had previously mainly relied on open market operations to mop up excessive liquidity in the financial system.

"As the PBOC is set to drain money via the operations this week, the possibility for another RRR hike is decreasing," said a dealer at a Chinese state-owned bank in Beijing.

"But nobody can be 100 percent certain as the central bank has surprised too many times with unexpected tightening steps since the new tightening cycle was put in place."

The benchmark five-year IRS fell 7 basis points to 3.93 percent while the one-year IRS dropped 4 bps and the 10-year IRS decreased 6 bps.

On the money market, the benchmark seven-day repo rate fell to 4.8512 percent by midday from 5.3162 percent at the close on Monday, but was still high compared with a level of 3 percent that traders say is an acceptable rate for short-term funding.

The shortest overnight repo rate dropped to 2.4503 percent from 4.0301 percent and the 14-day repo rate fell to 5.1758 percent from 5.3139 percent.

CAPITAL INFLOWS SLOW

Another factor that may delay an imminent RRR hike was reflected by data from the PBOC on Tuesday that implied capital inflows into China slowed in June.

The PBOC, together with other financial institutions, bought 277 billion yuan worth of foreign currencies flowing into China in June, according to Reuters calculations based on the data called the "Position for Forex Purchase".

That was down sharply from 376 billion yuan in May -- a figure that helped cause a surprising RRR hike by the PBOC in mid-June when the data was announced. A typical 50 basis-point RRR hike will freeze nearly 400 billion yuan based on total deposits.

However, other Chinese data implied that the government's monetary tightening may still be on the cards in its campaign against high inflation, traders said.

Foreign exchange reserves soared to a record $3.2 trillion at the end of June, threatening to worsen China's inflation headache as bank lending and money growth expanded faster than forecast, data issued on Tuesday showed.

And annual inflation in June accelerated to a three-year high of 6.4 percent, weekend data showed.

Copyright Reuters, 2011