China’s benchmark money-market rates retreated from records after the central bank was said to have made funds available to lenders amid a cash squeeze.
The one-day repurchase rate dropped 384 basis points, or 3.84 percentage points, to 7.90 percent as of 9:33 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That is the biggest drop since 2007. The seven-day rate fell 351 basis points to 8.11 percent. They touched record highs yesterday of 13.91 percent and 12.45 percent, respectively.
“The worst is over; the PBOC is likely to serve as a last resort and intervene to calm the markets and avoid such huge volatility,” said Chen Qi, a Shanghai-based strategist at UBS Securities Co. “Although a reduction in interest rates or reserve ratios is not likely in order to avoid confusing policy signals, we do think reverse repos are very likely to be resumed and PBOC will use window guidance as well. We expect liquidity tightness to persist.”
Interbank lending rates spiked this week as the monetary authority refrained from using open-market operations to address a cash crunch in the world’s second-largest economy. The People’s Bank of China added 50 billion yuan ($8.2 billion) to the financial system through short-term liquidity operations yesterday, said Hao Hong, chief China strategist at Bank of Communications Co. in Hong Kong. A central bank press official said he was unaware of the matter, requesting anonymity in keeping with bank policies.
Maturing notes added a net 28 billion yuan to the financial system this week, down from 92 billion yuan last week. Chinese banks need to step up efforts to support economic reforms and do more to contain financial risks, the State Council said June 19 after a meeting led by Premier Li Keqiang.
The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repo rate, dropped 19 basis points to 4.51 percent in Shanghai, according to data compiled by Bloomberg. It reached an all-time high of 5.06 percent yesterday.
The cash injection “is exactly what I would expect,” Wee-Khoon Chong, a Hong Kong-based strategist at Societe Generale SA said yesterday. “Market stability should always be the top priority of regulators and central banks.”
Banks paid 6.5 percent for 40 billion yuan of six-month deposits from the Finance Ministry at an auction yesterday, the highest rate since March 2012 and up from 4.8 percent at the previous sale on May 23. The yield on top-rated commercial banks’ six-month debt was 5.87 percent yesterday, the highest since 2007 and 199 basis points more than at the start of this month, ChinaBond data show.
The People’s Bank of China sold 2 billion yuan of three-month bills yesterday at a yield of 2.91 percent, after a similar-sized sale at the same rate two days earlier. The monetary authority has refrained from conducting reverse-repurchase agreements, which inject funds, since February.
Policy makers could be taking advantage of tight funding to “punish” some small banks, which previously used low interbank rates to finance purchases of higher-yielding bonds, Bank of America Merrill economists led by Lu Ting wrote in a report yesterday. Tight interbank liquidity could last until early July, according to the report.
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