China money rates shoot up as tightening worries rise

China money rates shoot up as tightening worries rise

1:52am EDT

* 7-day repo contract rise more than 1 percentage point

* Beijing is concerned with inflation, property prices

* Intervention to hold back yuan adding liquidity

* Traders will watch c.bank ops on Thurs for more signals

By Pete Sweeney

SHANGHAI, Oct 23 (Reuters) – China’s primary short-term money rates rose on Wednesday in a delayed reaction to signals from regulators they are considering tightening liquidity to tamp rising inflationary pressure. A policy adviser to the People’s Bank of China (PBOC) told Reuters on Tuesday that the authority may tighten cash conditions in the financial system to address inflation risks.The benchmark seven-day repo contract, which has been on a steady slide since Oct. 9, rose steeply in the morning session with quotes as high as 4.55 percent, up more than a full percentage point from the previous final closing quote.

Beijing is concerned that unexpected rises in inflation and property prices may be partly attributable to liquidity washing into the interbank market from capital inflows and fiscal deposits.

Government tax revenues deposited in Chinese commercial banks have grown so large that regulators have been able to use them as a monetary policy tool.

In September, purchases of foreign exchange by the People’s Bank of China (PBOC) and Chinese commercial banks soared. The total, on a net basis, was 126.4 billion yuan ($9.52 billion), compared with August’s 27.3 billion yuan.

The purchases imply there are rising capital inflows seeking to exploit an ongoing rally in the yuan. In order to sterilise the impact of such inflows, the PBOC buys dollars and sells yuan – which adds liquidity to the domestic market.

In another signal that mild tightening may be under way, the PBOC abstained from open market operations on Tuesday for the second consecutive session, leaving the interbank market set to drain another 58 billion yuan this week – unless the bank injects or drains funds during coming operations on Thursday.

The central bank has already drained a net 99.5 billion yuan from the money market since the end of September.

WORRYING HOME PRICES

Official data showed house prices rose the most in nearly three years in September, with some cities posting double-digit gains. Entrenched real estate inflation is considered a major systemic risk by economists, as it can divert capital from more productive uses and simultaneously reduce the ability of Chinese consumers to spend on other things.

The net impact of trade in the benchmark seven-day repo contract has brought the instrument’s volume weighted average price (VWAP) back above 4 percent, which traders say indicates moderately tight conditions.

The overnight repo rate also rose, with its VWAP gaining 70 basis points to 3.79 percent by midday.

“Traders are a bit more nervous today compared to yesterday,” said a trader at a major state-owned bank in Shanghai. But she added that there was no shortage of liquidity, so the higher rates were more reflective of increasing cautious sentiment.

Rates initially showed little sign of reaction when the PBOC stayed on the sidelines on Tuesday, but the nature of contract settlement in the interbank market frequently causes rates to post a delayed reaction to moves by the central bank.

The trader said her peers are watching what the bank does during regularly scheduled open market operations on Thursday. There are no signs of panic similar to what occurred during a cash crunch in June when some rates were quoted as high as 30 percent, she said. ($1 = 6.0935 Chinese yuan)

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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