China's money rates rise after Baoshang Bank takeover stokes liquidity worries

By Andrew Galbraith and Winni Zhou

SHANGHAI, May 28 (Reuters) - China's primary money rates rose on Tuesday as market sentiment remained fragile after the takeover by regulators of a troubled regional bank.

The People's Bank of China (PBOC) vowed on the weekend to offer liquidity support to Inner Mongolia-based Baoshang Bank [RIC:RIC:BAOTO.UL] after regulators took it over, citing serious credit risks posed by the lender.

While the central bank kept pumping liquidity into financial system, interbank rates stayed up on worries about broader contagion risks.

The PBOC injected a net 70 billion yuan ($10.14 billion) through its regular open market operations on Tuesday, following on from the previous day's 80 billion yuan net cash injection.

"The Baoshang incident is pressuring short-term liquidity," said a trader at a Chinese bank. "Along with month-end seasonal factors, cash conditions are becoming tighter and pushing up the near-date swap points higher. And that has led the swap curve moving upward."

Chinese liquidity conditions typically tighten at month-end, triggered by factors including bank requirements for funds to meet regulatory requirements such as loan-to-deposit ratios.

On Tuesday, the volume-weighted average rate of the benchmark seven-day repo CN7DRP=CFXS traded in the interbank market, considered the best indicator of general liquidity in China, was 2.8489%. That was 7.66 basis points higher than the previous day's closing average rate, and up more than 30 basis points from the previous week's close of 2.5469%.

The Shanghai Interbank Offered Rate (SHIBOR) for the same tenor rose to 2.8230%, up 11.20 basis points from the previous close, and 23.1 basis points from Friday's closing rate.

The one-day or overnight rate stood at 2.8000% and the 14-day repo stood at 3.0695%.

The takeover of Baoshang Bank had jolted markets on Monday, leading to a rise in yields on some banks' negotiable certificates of deposit, a popular short-term interbank debt instrument. The spread between low-rated 3-month NCDs AANCD3MS=CFXS and their AAA rated equivalents widened by 4.57 basis points on Tuesday, according to Refinitiv data.

Analysts at OCBC bank said in a note on Tuesday that the takeover had sparked a sell-off in Chinese sovereign bonds on Monday after reports that corporate deposits and interbank liabilities over 50 million yuan could be subject to a haircut of 20%-30%, "due to concern about the possible break of implicit guarantee."

"This may cause interbank lenders to reassess their relationship with the smaller lenders," the analysts said.

On Tuesday, treasury futures rebounded from what market watchers viewed as an overcorrection, with the most-traded contract, for September delivery CFTU9, climbing as much as 0.37%.

"Futures took off as soon as the big banks started buying," said a Shanghai-based trader at an Asian bank.

Key money rates at a glance:

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.