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China money what makes chinese stocks tick answer the money market


´╗┐Chinese stock analysts find it difficult to identify a single clear reason for this week's sudden plunge in domestic share markets, but sometimes the simplest explanation is the best. Look no further than the money market. Since March, the benchmark CSI300 equity index has developed a near perfect inverse relationship with short-term money market rates, a Reuters analysis of market data shows. When rates fall, share prices rise and vice versa, suggesting stock markets are dependent almost entirely on fundamental liquidity conditions and precious little else. Authorities had pumped a net 85 billion yuan ($13.7 billion) into money markets at the end of June, just as they were trying to stop a free-fall in share prices. Stocks stabilized but then the central bank began cautiously draining funds and short-term borrowing costs crept higher. On cue, stocks tanked on Monday. With the market still on life support, any sign of rising short-term interest rates may have proved too much, too soon. Chinese brokerages are one key to understanding how changes in rates flow through to share prices, according to credit ratings agency Fitch."Notably, Chinese brokers - unlike banks - do not always have access to lenders of last resort, and become more reliant on interbank funding in times of stress," Fitch senior directors Jonathan Lee and Grace Wu wrote in a recent research note. China has orchestrated a share-buying campaign, led by brokers and backed by China's state margin lender and central bank, but short-term money market rates remain about 50 basis points higher than in May, at the height of the equity rally.

To help stem the latest rout, the People's Bank of China has injected a net 50 billion yuan ($8.1 billion) into money markets in the past 10 days alone, off-setting its cautious 45 billion net drain in mid July, following the initial equity rebound. The central bank did not respond to a request for comment.

WHAT GOES UP... Market data suggests the spike in share prices in the first half of this year was driven largely by the central bank's decision to drastically push down short-term borrowing costs at the end of the first quarter. From late February to mid May, it drove the benchmark seven-day repurchase (repo) money market rate down by an astonishing 300 basis points, a larger drop even than during the opening weeks of the global financial crisis in 2008. Other short-term benchmark rates quickly followed suit. Share prices skyrocketed as the cheaper funds flowed into stocks, with the market rising 50 percent from March to June.

From early March to July, the CSI300 and the 7-day repo had a correlation of minus 0.77 on a weekly basis, not far off a perfect inverse relationship of minus 1. For a decade until early 2015, it had been a statistically insignificant 0.2. Money rates began rising in late May as unconfirmed reports emerged that the central bank, concerned that too much excess liquidity was making its way into equities, had begun draining cash via repo agreements from selected banks. Two weeks later, the one-month repo was up 80 basis points and shares were poised to plunge, only stabilizing after the central bank resumed large cash injections in late June. MONETARY POLICY IMPACT The share market's relationship with the money market may also complicate monetary policy. To reduce speculation and guide more money into long-term productive investment, the central bank had been trying to push down long-term rates and wean borrowers off easy short-term money. But a wobbly stock market puts it under pressure to keep short-term rates low to support share prices. While long-term rates on safe-haven government debt and policy-bank bonds have indeed fallen sharply since the equity correction in late June, yields on corporate debt so far have barely budged.

Money markets ecb rate cut unlikely to send cash to us jpmorgan


´╗┐Bank's decision to cut the rate it pays banks for depositing money overnight is unlikely to spur much of a flow of cash into U.S. money market funds, according to a strategist at JPMorgan Securities. The ECB cut its main interest rate on July 5 to a record low of 0.75 percent and reduced the deposit rate it pays banks for parking money with it overnight to zero in an effort to breathe life into the flagging euro zone economy. However, banks will likely continue to deposit funds in Europe despite the lack of a return, said Alex Roever, short-term fixed income strategist at JPMorgan Securities in New York."We expect only a limited amount of this money to work its way into U.S.-dollar based assets in search of a yield advantage," Roever said."Most of the money invested in Euro-based funds isn't there because of relative value versus other currencies, rather it is there because the shareholders have a need for liquid assets denominated in the euro," he said."We think cash that may leave a euro money market fund is more likely to wind up on deposit at a core European bank than it is to be invested in a U.S. money market fund," he said.

Euro zone bank-to-bank lending rates hit new all-time lows on Monday in the wake of the ECB move, and could ease further before stabilizing at a premium over overnight rates. Short-term Euribor rates that banks publish for lending to each other have been driven to an all-time low, which in turn should encourage consumers and companies to borrow more at the lower rates. But that fall for the moment looks academic given that nervousness over economic and systemic threats are still prompting banks in reality to keep vast quantities of their cash parked at the ECB. The unprecedented cut in deposit rates to zero means institutions get no return on that cash but not that that has made a difference to the amount of money parked at the ECB - much of it has just been shifted to a current account facility which also offers no interest.

That suggests that, at least initially, no-one in the sector has enough faith in public finances in the euro zone, its banking sector or the health of a reeling economy to risk lending more. Most analysts are skeptical that will change."It doesn't matter what rate it is, the banks aren't going to lend," one trader said. "Balance sheets haven't been restored and what's going on regarding Libor, more banks are going to get fined, that's a hit on their balance sheet as well."Barclays Plc, the bank at the center of a scandal over the attempted manipulation of London's Libor system of setting interbank rates, was fined a record $450 million last month by U.S. and British authorities.

It is the only bank so far to admit any wrongdoing in giving false information as part of the complex process of setting Libor, but more than a dozen banks are expected to be drawn into the scandal, which is being probed by authorities in North America, Europe and Japan. Three-month Euribor rates, traditionally the main gauge of bank-to-bank lending, hit a new all-time low of 0.477 percent on Monday, down from 0.486 percent on Friday. The trader expected Euribor rates to stabilize around 0.30-0.35 percent, offering a premium over Eonia overnight rates which have also fallen steadily since the ECB rate cut. Eonia rates were last at 0.12 percent, having fallen sharply after the deposit facility rate -- which serves as a floor for bank-to-bank overnight rates -- was cut to zero. Forward contracts suggest those rates will only stabilize at around nine basis points."Expectations of low Eonia rates have become deeply entrenched. Eonia is now expected to rise above 75 basis points (0.75 percent) only after three years," Deutsche Bank said in a research note. Richard McGuire, strategist at Rabobank, also does not expect the reduction in the deposit facility rate to spur bank lending in the current scenario."We are still flirting with recession in Europe and in the developed world and hence banks are reticent to lend against such a backdrop," McGuire said.