Interbank rates probed for liquidity clues

Lucy Hu, a website editor, was eager to transfer her year-end bonus to a money market fund in late December to take advantage of returns nearly 20 times those of demand interest rates.

'I was happy to receive my bonus early enough to catch a year-end surge of returns,' Hu said. 'I now put almost all my money in various funds because I read that interest rates will remain high until after the Chinese New Year.'

Every day, Hu can get more than 2 yuan (US$0.33) for each 10,000 yuan she's invested in the fund, nearly 50 percent higher than usual returns.

Though she is a financial greenhorn, Hu said she has tried to familiarize herself with the Shanghai interbank offered rate, or Shibor, which measures the borrowing costs among banks, after a brochure provided by a money market fund said returns are closely related to the rate.

'Returns of money market funds exceeded 10 percent last June, when all papers were talking about a money crunch among banks,' she said. 'I was kind of expecting the same thing to happen now, but it hasn't.'

The relationship between ordinary people and central bank monetary policies has never been so apparent as it has recently, partly thanks to many payment platforms that facilitate sales of money market funds.

The Shibor jumped to above 8 percent in various terms in the final days of December, when banks usually keep cash in hand to 'window-dress' their year-end financial reports.

The rise was also the result of a relatively smaller money injection from the central bank, compared with previous years. Official data show that the central bank injected a net 119.2 billion yuan into the financial market last year, not yet one-10th of the injection in 2012.

The tightening all started in June, when the central bank's restraint in money injections caused what was dubbed the decade's most serious money crunch among banks. The move was interpreted as a signal that the central bank was distancing itself from policies that support bank expansion and embracing policies that emphasize risk management.

Administrative signal

'The open market operations contain obvious administrative signals,' said Liu Qiyuan, an analyst with Qilu Securities Co. 'Operations of the central bank were slower than market expectations, especially during liquidity stresses in June and December. The relatively tight stance was also reflected in the total amount of money injected.'

Since June, the benchmark seven-day Shibor has been hovering between 4 percent and 6 percent, much higher than norm of about 3 percent.

Looking into the new year, analysts said they expect the central bank to continue to maintain relatively tight liquidity, keeping interest rates above the norms of the past years, though moves are likely to be kept as mild as possible to avoid panic in the market.

That could be good news for safe-minded investors like Lucy Hu, but the impact on the economy is much harder to predict.

'Interest rates are not likely to go straight up as they did last year, but they may stay relatively stable at a high level,' CITIC Securities said in a report.

Analysts also said corporate profitability isn't likely to improve much this year as the overall economic environment and higher interest rates make companies less willing to borrow and invest.

A high-level central government economic meeting held in December set the tone for policies that focus on maintaining appropriate economic growth, stabilizing consumer prices and the job market, and reducing the financial risk of local government debt.

Uncertainties remain, such as cross-border foreign exchange flows, the restarting of initial public offerings and local governments' fund-raising needs. All may weigh on market liquidity.

The intention of the central bank, however, is hard to interpret from the hazy wording of its quarterly or annual reports.

‘Stable and appropriate'

In its fourth quarter report released in November, the bank said it will continue 'prudent' monetary policies and keep liquidity 'appropriate.' That wording differed from the third quarter report, when the bank said it would guide 'stable and appropriate' growth of credit.

This difference, according to Liu of Qilu Securities, does not lead to any affirmative conclusion on policy direction.

But the central bank has, at least, made interbank liquidity more flexible and transparent by publicizing its short-term liquidity operations in December for the first time, a measure that allows 12 banks to initiate short-term money trade with the central bank when the market is short of cash.

Changes are also expected in the regulation of credit risk at commercial banks, which would reduce their need to 'window-dress' financial reports every quarter.

'Taking into consideration the central bank's long term goal to loosen controls over lending and deposit rates, it needs to nurture a new benchmark that will substitute for the current policy rate,' the CITIC report said. 'Shibor is a very likely candidate. The central bank needs to prevent short term and violent fluctuations of rates.'