The Shanghai Interbank Offered Rate has just posted its first uptick since the end of the Chinese New Year, with some money market traders concerned about a potential tightening of liquidity in March.
While the overnight and 7-day SHIBOR rates declined steadily just after the Lunar New Year to approach pre-vacation lows, they have since posted a sizeable rebound on 28 February.
On 1 March the People’s Bank of China also made its first net removal of liquidity since the end of the holiday, with 10 billion yuan in liquidity withdrawn as 160 billion yuan in repo agreements matured against 150 billion yuan in new agreements.
Market concerns over a tightening of funds in March have consequently increased, with one money market trader from a bank in north-eastern China telling 21st Century Business Herald that rates for 9-month certificates of deposit rose to 5.08% on 2 March, for an increase of 3 – 5 basis points compared to pre-vacation levels.
“Because banks has made quite ample preparations prior to the vacation, funds have been quite loose, the prices of certificates of deposits saw an increase.
“However, over the past few days funds have tightened considerably compared to before the vacation, and the central bank hasn’t made any recent injections of funds, leading the cost of funds on the market to increase.
“Over the past two days in particular funds have tightened considerably, starting from the afternoon of 27 February.”
Another trader from a commercial bank in central China also confirmed reports of a tightening in funds over the past two days, which he imputed to the monthly transition as well as macro-prudential assessments of banks.
Contingent reserve arrangements, provided to commercial lenders by the central bank to shore up liquidity around the time of the Chinese New Year, are also starting to expire, putting greater pressure on system funds.
According to the trader other members of the sector see a strong likelihood of an increase in rates.
Sealand Securities analyst Jin Yi (靳毅) said that the convening of China’s two congressional assemblies in March would have an impact on short-term monetary policy, compelling the central government to focus heavily on stability.
Jin points out that while PBOC habitually withdraws funds towards the end of the month, it made a sizeable injection at the end of February after the Chinese New Year.
According to Jin there will be no means of forecasting whether there will be a marginal loosening in monetary policy until we see PBOC’s open market operations after China convenes its two congressional meetings later this month.