SHANGHAI, July 23: China’s money rates rose on Tuesday morning after the central bank held back from open market operations, but some traders said they suspected short-term rates were being manipulated downward by larger banks.
The volume-weighted average for the benchmark seven-day bond repurchase agreement contract opened flat but rose slightly in the morning session, gaining over 4 basis points to 3.9817.
The overnight rate also rose modestly to 3.1668 percent from 3.1213 percent, while the 14-day repo changed hands at 4.1223, up only slightly from Monday’s close.
China’s interbank market is in focus this month after the People’s Bank of China effectively engineered a credit crunch at the end of last month by refusing to inject enough cash to let companies make scheduled tax payments and get their books in order for the end of the second quarter.
The central bank’s decision to stand aside even as short-term borrowing costs spiked to record highs was meant to drive home a message to banks that they could no longer count on cheap cash to fund riskier operations.
The squeeze, although brief, was dramatic, with the overnight tenor quoting as high as 30 percent on one day, and local media reporting stories of defaults and empty ATMs.
As Chinese banks head toward the end of July, they are under pressure to make dividend payments to shareholders, and dealers are watching to see what the central bank does as a signal of its intentions to short term interest rates and by extension its wider macroeconomic policy.
So far the bank has been utterly passive, neither draining nor injecting funds through open market operations since June 20. As a result, previously issued maturing bills and repos have steadily injected funds into the interbank market.
‘Money conditions are tight, and even major state-owned banks do not lend decently,’ said a dealer at an Asian bank in Shanghai. ‘This tightness is likely to last until early August.’
Traders and economists are divided over the PBOC’s intentions, with some economists warning that the central bank could allow another cash crunch if the country’s financial system continues to aggressively grow credit in the shadow banking sector.
But others have said that this time around regulators are trying to signal that the market should stay calm, both through statements reaffirming Beijing’s commitment to policy stability in domestic media and by refraining from draining funds from the interbank market.
In another sign the government may privately become more flexible towards liquidity supply, local media reported that senior officials have recently said at meetings that 7 percent will be the bottom line of China’s economic growth. These reports cannot be independently confirmed.
A dealer at an Asian bank in Shanghai said that he believed the opening rates were actually being guided artificially low this morning through opening quotes from large state-owned banks.
‘This morning was really weird. The main tenors opened up immediately with these large transactions. I think it could have been guidance from the big banks.’
Because dealers look at the volume-weighted average price (VWAP) to assess the market state of a given tenor, a single large transaction can have heavy influence on the VWAP right out of the gate.
This is not the first time dealers have suggested that market-driven rates should be tighter than they have been in over the last few trading days given the need to meet dividends, but allegations of manipulation are difficult to prove.
(AGENCIES)
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