SHANGHAI: China's money market rates surged higher on Wednesday, prompting concerns that high rates may persist after the New Year holiday unless the central bank steps in with additional easing measures.
Last year, the seven-day repo peaked at 6.3679 percent on Dec. 30, then fell sharply, dropping below 3 percent by Jan. 7. It rose again in late January leading up to the Lunar New Year holiday, which officially started on Feb. 3.
Traders had previously expected this year to follow a similar pattern, but in recent days liquidity has tightened, and market sentiment has shifted.
"If they (the central bank) don't adjust, I expect rates will stay high after the New Year holiday," said a trader at a major state-owned bank in Beijing.
The benchmark weighted-average seven-day government bond repurchase rate leapt 33 basis to 4.7815 percent at midday.
The 14-day repo rate also rose by 15 bps 5.5544 percent.
Both rates are now at their highest point since Oct. 31.
The four major state-owned bank are not lending in the interbank market this week, several traders said, adding to the relative scarcity of funds.
Given the Lunar New Year holiday will fall in January next year, some traders now expect high rates to stay at elevated levels until then, unless the central bank moves to inject further liquidity.
The People's Bank of China (PBOC) has apparently already taken a small step towards easing liquidity. The PBOC is likely to skip its regular sale of 3-month bills on Thursday due to lack of demand from banks, traders said.
With 13 billion yuan in bills and repos set to mature this week, a decision by PBOC to skip bill issuance would make a net liquidity injection for the week highly likely.
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