China’s benchmark money-market rate fell to a six-week low and bonds rallied as the central bank moved to a daily schedule of open-market operations and took advantage of the change to further saturate the financial system with funds.
The People’s Bank of China (PBOC) yesterday added 100 billion yuan (US$15 billion) via reverse-repurchase agreements, taking this week’s net injections via the lending tool to a record 690 billion yuan.
The monetary authority said it would conduct such operations daily between yesterday and Feb. 19, apart from during the week-long Lunar New Year holiday that begins on Sunday next week. The usual auction windows are on Tuesday and Thursday.
Photo: AFP
The one-month Shanghai interbank offered rate on Thursday climbed to the highest since July, buoyed by a combination of pre-holiday cash demand and record capital outflows.
Policymakers are trying to avoid exacerbating an exodus of funds by refraining from cutting lenders’ reserve-requirement ratios, while at the same time keeping borrowing costs from rising amid the slowest growth in a quarter century.
“The higher frequency of operations shows the PBOC’s intention to tame money rates ahead of the holidays,” said Li Liuyang (李劉陽), Shanghai-based chief financial market analyst at Bank of Tokyo-Mitsubishi UFJ (China) Ltd. “Appropriate liquidity management has become an increasingly important task for the central bank.”
The seven-day repurchase rate, a gauge of funding availability in the financial system, dropped 5 basis points to 2.26 percent as of 2:12pm in Shanghai, a weighted average from the National Interbank Funding Center shows. It fell to 2.2 percent earlier, the lowest since Dec. 15. Government bonds rallied, pushing the yield on notes due October 2025 down by 4 basis points to 2.87 percent.
Yesterday’s operations brought the net injections this month to 1.9 trillion yuan, including 1.235 trillion yuan via reverse repos and 612.5 billion yuan through its medium-term lending facility, data compiled by Bloomberg show.
The PBOC plans to arrange 1.6 trillion yuan of short-term funds and as much as 800 billion yuan of medium-term liquidity support, according to the transcript of a PBOC meeting posted on Sina.com on Friday last week.
The central bank auctioned 20 billion yuan of seven-day reverse repos and 80 billion yuan of 28-day contracts yesterday at 2.25 percent and 2.6 percent respectively.
The monetary authority on Thursday said it would expand access to short-term liquidity operations to an additional seven banks, and allow bonds issued by government-backed institutions and commercial banks to be used as collateral.
This is the first time that the PBOC will conduct open-market operations on a daily basis, said Ming Ming (明明), Beijing-based head of fixed-income research at Citic Securities Co (中信證券) who previously worked in the central bank’s monetary policy division for eight years.
The PBOC gauged demand for 14 and 28-day reverse repos for Monday’s operations, as well as 14 and 28-day repurchase agreements and 91-day bills, according to a trader at a primary dealer required to bid at the auctions.
“Looking ahead, it’s likely for the central bank to gauge demand daily when necessary as it attempts to build a new benchmark interest rate,” Li said.
“The drawback of the current twice-weekly arrangement prevents prompt reaction to sudden changes in the market,” Li said.
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