China 7-day repo rate up, PBOC injects money into market

SHANGHAI: China's benchmark money market rate, the seven-day repo rate, rose on Thursday morning to regain a very high level of 5 percent, propelled by a liquidity squeeze worsened by the approach of the end of July.

Banks typically need more cash at the end of a month to meet month-end regulatory requirements, including loan-to-deposit ratios, adding to an existing shortfall of funds in the money market driven mainly by the government's tight monetary policy.

The seven-day government bond repurchase rate rose 9 basis points to 5.0646 percent by midday from 4.9715 percent at Wednesday's close, compared with short-term fundraising cost of around 3 percent considered acceptable by market standards.

But in a sign that demand has now shifted to borrowings that stretch across to early August to meet regulatory requirements, the shortest overnight repo rate fell to 3.6542 percent from 4.1755 percent and the 14-day repo rate dropped to 5.7948 percent from 6.3808 percent.

"With the central bank set to inject money into the market again this week, liquidity conditions are likely to improve next week," said a trader at a Chinese bank in Shanghai.

The People's Bank of China refrained from draining funds from the market via its government bond repurchase agreements in its regular open market operations on Thursday and sold only a symbolic 1 billion yuan ($155 million) in three-month bills.

It also only sold 1 billion yuan in one-year bills on Tuesday and is thus on course to inject a net 32 billion yuan into the market compared with 34 billion yuan maturing PBOC bills this week. Last week, the PBOC conducted a net injection of 19 billion yuan into the market.

However, China's very flat interest-rate swap curve, with one- to five-year swap rates identical on Thursday after having inverted repeatedly in the past two weeks, indicates the current money market liquidity squeeze is not yet over.

The short-term one-year IRS rose 3 basis points by midday, staying at a very high level of 4.22 percent, compared with 4.22 percent for benchmark five-year IRS and 4.27 percent for 10-year IRS

Copyright Reuters, 2011