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China Money Rate Jumps to July High; PBOC to Add Funds Tomorrow

China’s money-market rate jumped to a six-month high on speculation a cash shortage is worsening as banks hoard money ahead of the weeklong Lunar New Year holiday.

The People’s Bank of China gauged demand for cash from domestic banks today and will add funds through 14-day reverse repurchase operations tomorrow and on Jan. 19, according to two traders at finance companies that participate in government debt auctions, who declined to be identified because the information isn’t public. Financial markets are closed for a week starting on Jan. 23 for the Chinese New Year holiday.

“We continue to believe reserve-ratio cuts are needed in the first quarter to solve the structural tightness in banking system liquidity, as foreign-exchange inflows and fiscal spending patterns are unfavorable,” Ju Wang, a strategist at Barclays Capital in Singapore, wrote in a research report today.

The seven-day repurchase rate, a gauge of funding availability in the financial system, increased 1.27 percentage points, to 6.16 percent in Shanghai, the highest level since July 22, according to a weighted average compiled by the National Interbank Funding Center.

The central bank cut the amount of cash that banks must set aside as reserves for the first time since 2008 last month as Europe’s debt crisis dimmed the outlook for exports and growth. The 50 basis-point decrease in reserve-requirement ratios took effect on Dec. 5.

GDP Report

Official data due tomorrow will show China’s gross domestic product rose 8.7 percent from a year earlier in the three months ended December, compared with 9.1 percent in the prior quarter, according to the median forecast of 26 economists surveyed by Bloomberg News. Foreign-exchange reserves dropped in December, central bank data released on Jan. 13 showed.

The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, fell four basis points to 3.04 percent in Shanghai, according to data compiled by Bloomberg. The yield on the 3.93 percent government bonds due August 2021 rose one basis point to 3.41 percent.

The PBOC published a list of 50 primary dealers allowed to participate in open-market operations in February, including Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp., China Citic Bank Corp., Industrial Bank Co. and Postal Savings Bank of China.

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