China's regulators issue new rule in bid to reduce sharp deposit fluctuations

SLFs can handle possible "money shortages".

Regulators have recently issued a new rule to reduce sharp fluctuations in deposits at the end of each month.

According to a research note from CCB International, it believes the short-term lending facilities (SLFs) will preempt man-made "money shortages" arising from the new rule.

In addition to easing short-term liquidity issues, SLF money will be allocated to the money and bond markets in order to reduce interbank and the bond market interest rates.

Here's more from CCB International:

As a result, China's 10-year government bond yields fell 9.5bp to 4.21% last week.

However, SHIBOR rates increased last week: 1-week and 1-month SHIBORs rose 6bp and 32bp to 3.30% and 4.31% reflecting short-term liquidity pressure near quarter-end.

Overnight SHIBOR remained largely stable at 2.84% last week, down merely 1bp from two weeks ago.

The credit spread between 3-year and 5-year corporate bonds (AA level) and government bonds widened 7bp and 9bp, respectively, last week, mainly due to the sharp drop in government bond yields.