China’s money rates mixed amid deleveraging

Liquidity remains tight despite PBC’s biggest net injection since Jan

China’s primary money rates were mixed last Friday despite the largest weekly net injection in half a year as tax obligations kept liquidity tight and as regulators continue to encourage deleveraging.

The volume- weighted average rate of the benchmark seven- day repo traded in the interbank market, considered the best indicator of general liquidity in China, was 2.8770 percent, up about 3 basis points from the previous day’s closing average rate.

The People’s Bank of China ( PBC) injected 140 billion yuan ($ 20.7 billion) into money markets on Friday, bringing total injections over the past week to 510 billion yuan. It was the biggest net injection since the week of January 16.

Last week’s net injection compares with a net drain of 70 billion yuan a week earlier.

Despite the injections, market participants said overall liquidity remained relatively tight as banks sought to meet tax and reserve requirement obligations. A Shanghai- based trader said that 835 billion yuan in local government bond issuance this month was also affecting market liquidity.

Tight conditions are likely to remain as regulators continue to push for deleveraging throughout the financial system.

“I don’t see much liquidity improvement in the next few weeks. As the leverage in the bond market is not reducing, the PBC has no reason to make leverage takers’ lives easier,” said the trader.

The tightening bias is expected to continue beyond the next several weeks. “In general, I think the PBC will implement monetary policy with a tightening bias. Even though it is injecting cash, it is not sufficient to cause a decline in the market rate,” said Ding Shuang, head of China economic research at Standard Chartered in Hong Kong.

He expects the market rate to remain relatively stable, though at a higher level than earlier this year.

The seven- day Shanghai Interbank Offered Rate fell less than 1 basis point from the previous close to 2.8470 percent.

The overnight repurchase rate, a gauge of interbank funding availability, rose to 2.81 per cent, up 21 basis points last week through Thursday.

The spread of the five- year credit default swap rate on Chinese sovereign debt fell 1.85 percent to 66.41.