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China Money Rate Increases as Corporate Tax Payments Fall Due

China’s money-market rate rose to this week’s high on speculation cash supplies will tighten as companies make annual tax payments.

The People’s Bank of China issued 27 billion yuan ($4.3 billion) of 91-day repurchase contracts today to drain liquidity, according to a statement on its website. Chinese companies are expected to make tax payments totaling some 600 billion yuan this month and next and those funds will be placed with the central bank, according to Sheng Hongqing, chief economic analyst in the financial markets department of China Everbright Bank Co.

“The market is concerned the tax payments will take a lot of money out of the financial system,” Sheng said in Beijing. “It’s necessary for the central bank to cut reserve ratios in the second quarter.”

The seven-day repurchase rate, which measures interbank funding availability, rose two basis points to 3.80 percent as of 4:30 p.m. in Shanghai, according to a weighted average rate compiled by the National Interbank Funding Center. It reached 7 percent on Feb. 23, the day before lenders’ reserve-requirement ratios were lowered for the second time in three months.

The one-year swap contract, the fixed cost needed to receive the floating seven-day repo rate, increased six basis points to 3.26 percent, the biggest gain since March 20, according to data compiled by Bloomberg.

“We are very likely to go through a tax payment-related liquidity squeeze in April,” said Pin Ru tan, a rates strategist at HSBC Holdings Plc in Hong Kong. “If they don’t cut the reserve ratio, the seven-day repo may go above 4 percent from next week onward.”

The central bank injected a net 112 billion yuan of capital into the financial system this week, up from 25 billion yuan last week, according to data compiled by Bloomberg.

The yield on the 3.44 percent government bond due June 2016 climbed four basis points to 3.13 percent, according to the Interbank Funding Center. A basis point is 0.01 percentage point.

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