China's money market rates jumped on Monday morning as banks began meeting extra reserve rules due to a new policy that has expanded the base for bank reserve requirements.
China had widened the base for calculating banks' reserve requirements, Reuters reported, a move that would pull an estimated 800-900 billion yuan ($125-141 billion) from the banking system, or the equivalent of between two and three 50-basis-point increases in the reserve requirement ratio.
Banks have been given some grace period to meet the extra reserve requirements in batches, with major banks taking the lead to start to pay the first batch on Monday, traders said. The weighted average seven-day government bond repurchase rate jumped 67 basis points to 4.8872 percent by midday from Friday's close of 4.2140.
"A temporary liquidity squeeze resulting from the payment pushed money market rates sharply higher today," said a dealer at a major state-owned bank in Beijing. "But cash flow may improve as early as tomorrow as we don't feel there is an acute shortage of funds on hand." The shortest overnight repo rate surged to 3.9028 percent from 3.4729 percent while the 14-day repo rate
rose to 5.2968 percent from 4.9583 percent. While some analysts interpreted the move as another tightening step, many traders said the new policy was more a measure aimed at improving the health of banks and the supervisory system by putting a large part of banks' off-balance-sheet business under regulatory supervision.
To ease the money market squeeze, the People's Bank of China on Monday asked banks about their potential demand for 7-day and 14-day repos in its open market operations, signalling it might be planning to return to using the shorter tenors.
The PBOC last conducted such tenors of repos in January, when tight credit conditions prompted it to seek the greater flexibility of shorter tenors, rather than having to use 28- or 91-day tenors. Last week, the central bank refrained from doing repo business and drained 2 billion yuan ($31 billion) in bills, and thus injected a net 25 billion yuan into the market.
Traders said investors widely expected the PBOC to inject money into the market via its 176 billion yuan in maturing bills and repos this week, the eighth straight week of injection. The fund crunch kept the curve of China's interest rate swaps inverted on Monday, continuing the inversion of last week.
The one-year IRS edged down 1 basis point to 4.26 percent by midday, while the benchmark five-year IRS dropped 5 bps to 3.78 percent and the 10-year IRS lost 4 bps to 3.84 percent. Current Pros close Change (pct) (bps) 7-day repo 4.8872 4.2140 + 67.32 7-day SHIBOR 4.8775 4.2021 + 67.54 Note: Repo rate is weighted average.