China's 14-day money rates jump

Seasonal factors caused China's 14-day money rates to surge this week, but actions authorities took kept a lid on them. The surge was fuelled by hunger for cash among financial institutions ahead of tax payments and a quarterly central bank health check. Cooling things down were net liquidity injections through open market operations and a surprise move to lend money through the central bank's medium-term lending facility.
The volume-weighted average of the benchmark 14-day repo rate traded in the interbank market, at 4.1687 percent, was up nearly 117 basis points from the previous week's close of 3 percent. The rate had touched 6.5 percent on Thursday, its highest level since April 24, when tight market conditions ahead of a cut in banks' reserve requirements pushed it as high as 7.5 percent.
But traders said that moves by the People's Bank of China (PBOC) to inject liquidity ensured that the rate on 14-day money, sought this week by institutions to see them into the second half, remained relatively low. The volume-weighted average seven-day repo rate , considered the best indicator of general liquidity in China, fell 4.5 basis points to 2.7174 percent, compared with a closing average rate of 2.7627 on June 15.
The Shanghai Interbank Offered Rate (SHIBOR) for the same tenor was at 2.8190 percent, less than one basis point higher than the previous week's close. The one-day or overnight rate stood at 2.5616 percent. The PBOC injected a net 140 billion yuan ($21.54 billion) into money markets this week, following a net 240 billion yuan injection the week before. In addition, it unexpectedly lent 200 billion yuan to financial institutions on Tuesday through one-year medium-term lending facility (MLF) loans.
The central bank said the MLF move was intended to "make up for mid- to long-term liquidity gap in the banking system" to counter factors including tax payments, government bonds issuance and maturing reverse repos. Demand for cash among financial institutions is also higher as they prepare for the central bank's macroprudential assessment (MPA), a quarterly health check. "The PBOC does not want a liquidity shock, while at the same time keeping deleveraging going," said a Shanghai-based fixed income portfolio manager.
Still, he said, the liquidity injection did not indicate a loosening of the PBOC's policy stance. "When the US Fed is hiking rates, I don't think the PBOC has too much room to loosen," he said. Market watchers were similarly cautious about the potential for a cut in bank reserve requirements to boost broader market liquidity.