The People’s Bank of China (PBOC) yesterday tripled cash injections via open-market operations, helping to ensure an adequate supply of funds as it supports the yuan following last week’s devaluation.
The Chinese central bank auctioned 120 billion yuan (US$18.8 billion) of seven-day reverse-repurchase agreements, up from 40 billion yuan on Thursday, according to a statement on its Web site. That was the largest offering since January last year and was partially offset by 50 billion yuan of the contracts that matured yesterday. The interest rate on the reverse repos was kept unchanged at 2.5 percent.
“As the PBOC tries to stabilize markets, keeping liquidity ample to ensure proper functioning in the domestic financial system is essential,” said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd in Singapore. “The recent devaluation of the yuan has sparked speculation that further weakness is in store over the medium term.”
Central bank intervention to prop up the yuan removes funds from the financial system and risks driving borrowing costs higher unless the monetary authority releases additional cash.
The nation’s foreign-exchange reserves are expected to drop by about US$40 billion a month for the rest of this year as the PBOC buys the Chinese currency, according to the median of 28 estimates in a Bloomberg survey.
China may cut banks’ reserve-requirement ratios as liquidity tightens amid expectations of a weaker yuan, according to a front-page commentary in the China Securities Journal yesterday.
Increases in the interbank money rate, drops in excess reserve levels at banks and a decrease in yuan positions will pressure cash supply, the article said.
“The more intervention in the currency market, the tighter the money market will be,” said Zhou Hao (周浩), an economist at Commerzbank AG in Singapore. “If the PBOC injects too much, the market will worry about further devaluation pressure. It’s a balancing act.”
The overnight repurchase rate, a gauge of liquidity in the interbank market, rose 1 basis point to 1.7 percent as of 10:26am in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That is the highest level since April 28. The seven-day repo rate was little changed at a three-week high of 2.48 percent.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, erased an earlier increase of 2 basis points, and was steady at 2.58 percent in Shanghai, data compiled by Bloomberg show.
The contracts rose 5 basis points on Monday.
Chinese stocks plunged yesterday, as the yuan weakened against the US dollar, reigniting fears that Beijing may be intent on a deeper devaluation of the currency despite the central bank’s comments that it sees no reason for a further slide.
Concerns that companies may pull more money out of China as the economy slows, and speculation that the government may begin to scale back its massive support for the country’s stock markets also prompted investors to take profits after a run-up in prices over the last few weeks, traders said.
The Shanghai Composite Index closed down 6.1 percent at 3,749.12 points in its biggest daily decline since July 27, snapping a three-day winning streak, while the CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 6.2 percent at 3,825.41.
Additional reporting by Reuters
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