China's short-term money rates surge despite huge PBOC cash injection

SHANGHAI: China's primary short-term money rates surged on Wednesday to the highest level since the early days of the coronavirus pandemic a year ago, driven by rising seasonal cash demand, despite the central bank offering huge amounts of short-term funds.

The Shanghai Interbank Offered Rate (Shibor) for one-week tenor, the Chinese yuan equivalent of Libor, jumped 22.6 basis points (bps) to 2.493% on Wednesday, the loftiest level since Feb. 3, 2020, from 2.267% on Tuesday.

Another gauge that is considered the best indicator of general liquidity in China climbed to the highest since Nov. 13, 2020.

The volume-weighted average rate of the benchmark 7-day repo traded in the interbank market rose 19.45 bps to 2.5328%.

Traders said higher short-term funding costs were partly due to tax payments this week, while households and companies were also gradually withdrawing funds from the banking system to prepare for the upcoming Lunar New Year holiday in February.

Earlier in the session, the People's Bank of China (PBOC) injected 280 billion yuan ($43.28 billion) worth of seven-day reverse repos, and attributed the move to "counter factors including tax payments" while "keeping banking system liquidity reasonably ample".

Several money market traders said the tight liquidity conditions were unlikely to last for long as Wednesday marks the deadline for Chinese companies to report and make their quarterly tax payments for the fourth quarter of 2020.

Some analysts said they expect the PBOC to continue closely monitoring cash conditions and inject short-term funds as needed.

Investors have been scaling back bets for a cut to banks' reserve requirements before next month's long holiday, reflecting a belief that authorities will avoid strong easing signals in the midst of an economic recovery.

Separately, other tenors also surged to reflect tensions in the interbank money market. The volume-weighted average of the overnight repo rose to 2.4502% as of 0254 GMT, the highest since November.

"We think policymaking will be flexible this year, and data dependent," Oxford Economics said in a note this week.

"But overall, we expect policy to be tightened, against a backdrop of a solid global growth outlook and consistent with the Central Economic Work Conference's commitment to contain leverage and financial risks."