China money mar­ket rate jumps at high­est level

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SHANG­HAI: China's bench­mark money mar­ket rate jumped 22 ba­sis points to more than 6.25 per­cent on Thurs­day, its high­est level in three years, af­ter the cen­tral bank raised in­ter­est rates on the loans that it makes to com­mer­cial banks.

The Peo­ple's Bank of China (PBOC) an­nounced the in­creases in the re­dis­count and re­lend­ing rates on Wed­nes­day, the first such change in two years, a move that dove­tails with its Oc­to­ber and De­cem­ber bench­mark in­ter­est rate rises and sig­nals it is not let­ting up in its re­cent tight­en­ing cam­paign.

As banks rarely tap the PBOC for fund­ing, partly be­cause that would make them ap­pear fi­nan­cially un­healthy, the im­pact of the rate rises will be limited. But with fund­ing costs in the money mar­ket hav­ing surged re­cently, the PBOC's move to raise costs for banks to bor­row from it sent a sig­nal that it would not con­sider re­lax­ing its tight­en­ing stance re­gard­less of what hap­pens in the mar­ket, traders said. "Money mar­ket rates have now reached lev­els sim­i­lar to usury, al­though we ex­pect them to fall in Jan­uary when year-end fund de­mand eases," said a dealer at a Chi­nese bank in Shang­hai.

"This is some­thing no one in the mar­ket had ever ex­pected un­til the last two or three weeks. More sur­prises are pos­si­ble as many in­sti­tu­tions are now so alarmed that they may tend to hoard more money in the fu­ture."

On Thurs­day, the weighted av­er­age seven-day govern­ment bond re­pur­chase rate , the main barom­e­ter of short-term liq­uid­ity in the money mar­ket, rose to 6.3411 per­cent at mid­day from 6.1190 per­cent at the close on Wed­nes­day.

The short­est one-day bond repo rate surged 37 bps to 5.1042 per­cent and the 14-day rate rose 20bps to 6.5391 per­cent. Mar­ket liq­uid­ity has reached un­prece­dented tight con­di­tions as chronic fac­tors, such as banks need­ing money at the end of the year to help meet the loan-to-de­posit ra­tio and other reg­u­la­tory re­quire­ments, are cou­pled with fears of more tight­en­ing steps.

The PBOC has raised of­fi­cial rates twice since midOc­to­ber, both at times when they were not ex­pected, and it has also raised bank re­serve ra­tios three times since midNovem­ber. More im­por­tantly, there is no cor­re­la­tion be­tween mar­ket rates and banks' bench­mark in­ter­est rates that could help neu­tralise the acute liq­uid­ity short­fall. - PB News

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