China IRS flat, holiday rate rise a possibility

Chinese financial markets will be closed on Monday for the Dragon Boat Festival.

Markets are wary as the People's Bank of China has picked holidays or weekends to surprise on tightening steps, such as a rise in interest rates or banks' reserve requirement ratio (RRR).

China's consumer inflation, which possibly hit another multi-year high in May, has also been highlighted by state newspapers, raising the spectre of another rate hike this month.

"We don't see much business and everybody is cautious," said a trader at a major Chinese commercial bank in Shanghai.

The benchmark five-year IRS edged down 1 basis point to 3.77 percent at midday. The 10-year IRS nudged 1 bp lower while the one-year IRS was unchanged.

On the money market, the benchmark weighted average seven-day repo rate , fell 5 bps to 3.4700 percent by midday from 3.5222 percent at Thursday's close, with liquidity improving after factors related to the month-end faded.

The shortest overnight repo rate dropped to 2.5203 percent from 2.8556 percent. The 14-day repo rate fell to 4.1257 percent from 4.2012 percent.

The seven-day repo rate jumped 250 basis points over a span of two weeks in late May as a cash call before the end of May had aggravated an existing shortfall after the PBOC's latest RRR hike, which froze 370 billion yuan ($57 billion) when it took effect about two weeks ago.

Chinese companies also had to meet a deadline to pay their operational income tax for last year before the end of May, and banks borrowed money to meet month-end loan-to-deposit ratios.

The PBOC kicked off a new monetary tightening cycle last October, having since raised official interest rates four times and bank reserve ratios eight times as it fights inflation. Annual consumer price inflation in April eased a touch to 5.3 percent from a 32-month high in March of 5.4 percent.

Copyright Reuters, 2011