Wed Jul 18, 2012 10:52am IST
* Maturing reverse repos, bank dividends reduce supply * Firms preparing to pay interim taxes * Lingering cash tightness may encourage a quick RRR cut By Lu Jianxin and Pete Sweeney SHANGHAI, July 18 (Reuters) - China's short-term lending rates rose unexpectedly on Wednesday, disappointing investors who had borrowed overnight money on Tuesday hoping that liquidity would improve. Banks and companies that borrowed using overnight bond repos a day earlier to buy time, expecting money rates to decline, now find themselves squeezed into longer-tenor instruments to stay liquid, traders said. "Some market players had underestimated recent money demand and hoped to use the one-day repo to weather the liquidity squeeze," said a dealer at a Chinese state-owned bank in Shanghai. "But liquidity conditions now appear tighter than many had expected, with huge cash calls from maturing central bank reverse repos, from dividend payments by major banks and from companies paying or preparing to pay first-half taxes." The benchmark money market rate, the seven-day weighted average bond repurchase rate, rose a solid 19 basis points to 3.4687 percent at midday from 3.2803 percent at Tuesday's close. Another key rate, the 14-day repo rate, rose to 3.5562 percent from 3.2868 percent, while the shortest overnight repo rate climbed to 2.9522 percent, up from Tuesday's 2.6445 percent. A total of 155 billion yuan ($24 billion) reverse repos issued by the People's Bank of China (PBOC) in the last two weeks matured on Tuesday, and 50 billion yuan more will mature later this week. The central bank injected 40 billion yuan into the market on Tuesday via its regular open market operations, leaving the reverse repos to drain 115 billion yuan from the market on the day. TIGHTER SQUEEZE Aggravating already tight conditions, China's five biggest state-owned banks this month distributed a combined 209.1 billion yuan in cash dividends to shareholders from last year's net profits. The latest tranche of dividends, 42.7 billion yuan from the Agricultural Bank of China, was distributed on Tuesday. Meanwhile, Chinese listed companies have entered the interim results reporting season and firms have begun paying income taxes from their first-half earnings. While the reporting season kicked off on July 1 and will last until August 31, most companies post their earnings reports starting late July and begin paying the taxes around that time. As worries over short-term cash flows intensify, traders said investors are increasingly hoping for another PBOC cut in banks' reserve requirement ratios (RRR). Such cuts tend to provide more sustainable long-term increases to the money supply. "Market players believe the lingering squeeze may make the case to PBOC to cut RRR more quickly than expected," said a trader at a Chinese commercial bank in Shanghai. "Some expect the cut to be announced as early as this week." China's economic expansion has slowed sharply this year, posting gross domestic product growth of 7.6 percent on Friday, its slowest in more than three years. The PBOC has cut banks' RRR twice, in February and May, and reduced official interest rates twice, in June and again in July. Rumors of another RRR cut in the works have been swirling in the market since late June. China's interest rate swaps rose slightly on Wednesday, continuing a rebound early this week. The benchmark five-year IRS edged up 3 basis points to 2.66 percent at midday, up from Tuesday's close of 2.63 percent and a three-year intraday low of 2.53 percent hit last Friday. Current Prev close Change (pct) (bps) 7-day repo 3.4687 3.2803 + 18.84 7-day SHIBOR 3.4500 3.2771 + 17.29 Note: Repo rate is weighted average. ($1 = 6.3724 Chinese yuan) (Editing by Eric Meijer)
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