China’s key money rate jumps

China's benchmark money market rates jumped 49 basis points (bps) on Monday,following a huge rise late last week,as a chunk of funds from banks and other institutions were put aside for subscriptions for GD Power's convertible bond.

China’s benchmark money market rates jumped 49 basis points (bps) on Monday,following a huge rise late last week,as a chunk of funds from banks and other institutions were put aside for subscriptions for GD Power’s convertible bond.

GD Power Development Co auctioned 5.5 billion yuan ($861 million) in six-year bonds convertible into its Shanghai-listed shares,with traders estimating around 200 billion yuan ($31 billion) was frozen for the subscription.

* An estimated 200 billion yuan seen frozen for bond

* Dealers expect money rates to fall late this week

* Month-end demand also in focus

* Seven-day repo rate jumps 49 bps; short-term IRS up

The money will be freed up on Wednesday and Thursday,and may help improve market liquidity and push down money rates to some extent,traders said.

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But as the end of August is approaching and institutions may need more cash to meet regulatory requirements,including one for loan-to-deposit ratios,the benchmark seven-day government bond repurchase rate may not fall below 4 percent,they said.

A Lot of money is being frozen and that hits our deposits,said a dealer at a major Chinese state-owned bank in Beijing. After a slew of policy tightening,our ability to cope with a sudden burst of capital demand has been weakened.

The seven-day repo rate jumped to 5.0027 percent by midday from 4.5171 percent at Friday’s close,and the 14-day repo rate rose to 4.7898 from 4.5905 percent.

Propelled by the liquidity squeeze in the money market,short-term Chinese interest rate swaps also rose on Monday.

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The benchmark five-year IRS was up 7 basis points to 3.68 percent by midday,the one-year IRS also added 7 bps to 3.73 percent but the 10-year IRS dropped 3 bps to 3.73 percent.

MARKET LIQUIDITY TIGHTER

A squeeze caused by bond subscriptions is a new phenomenon in China’s money market this year and a strong indication that liquidity conditions are no longer always abundant as they were before the People’s Bank of China started a new cycle of monetary tightening last October.

On top of the jump in money rates,capital inflows into China plunged in July,data showed last week,so the PBOC may not raise banks’ reserve requirement ratios (RRR) for August for the second month in a row,traders said.

The PBOC unexpectedly let the yields on its bills rise nearly nine basis points each at auction in its regular open market operations last week.

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But the move was seen as a step by the central bank to normalise monetary policy from a tight stance as it is eager to drain money via open market operations instead of RRR hikes.

This latest development,plus global economic and market turmoil,will keep the PBOC from raising interest rates in August as well,traders said.

Overall,China’s monetary policy has entered an observance period and the government’s tightening steps will likely slow down,traders said.