China's overnight rate rises most in six months before holidays

China's overnight money rate jumped by the most in six months as demand for funds rose before a long weekend. It's now above the level it was at before the nation lowered its benchmark interest rate last week.

Chinese financial markets will be closed on Thursday and Friday for World War II victory day holidays and one-day inter-bank borrowing won't need to be repaid until Sunday.

The People's Bank of China cut its key policy rate and reduced the amount of cash banks needs to set aside as reserves on Aug. 25, spurring a 13 basis point drop in the overnight rate the following day. The reserves adjustment will take effect on Sept. 6.

"Some bank treasurers in Beijing may be already off today due to road closures for tomorrow's parade," said Lin Yijian, an analyst at Guangzhou Rural Commercial Bank Co. in the city. "This, along with the demand spanning the holidays, is driving up the money rates. With the reserve-ratio cut taking effect after the holiday, interbank funding costs should be able to come down."

The one-day repurchase rate, a gauge of interbank funding availability, climbed 21 basis points to 2.03 per cent in Shanghai, according to National Interbank Funding Center prices. That's the biggest increase since Feb. 27 and the highest level since April 20.

The PBOC sold 150 billion yuan ($23.6 billion) of seven-day reverse repurchase agreements on Tuesday, matching the amount of similar contracts that are maturing, leading to a neutral position in open-market operations this week. The central bank also conducted three Short-term Liquidity Operations in the past week to provide funds to lenders.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, climbed two basis points to 2.45 per cent, the highest level in a week. The yield on the sovereign bonds due July 2025 rose for the first time in 10 days, increasing four basis points to 3.35 per cent, according to data from the National Interbank Funding Center.