China’s benchmark money-market rates tumbled from record highs after the central bank injected funds to alleviate the worst cash crunch in at least a decade.
The overnight repurchase rate dropped 442 basis points, or 4.42 percentage points, to 8.43 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. That is the biggest drop since October 2007 and follows an unprecedented 527 basis point jump yesterday. The seven-day rate fell 227 basis points today to 8.50 percent, the largest decline since January 2012.
“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 rates strategist at UBS Securities Co. in Shanghai. “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 funds to the financial system via short-term liquidity operations yesterday, according to Hao Hong, chief China strategist at Bank of Communications Co. in Hong Kong. The central bank did not respond to faxed questions seeking comment.
The PBOC used reverse-repurchase agreements to inject funds into selected banks, Hexun reported today, citing an unidentified person close to the central bank. Industrial & Commercial Bank of China Ltd. (601398) and Bank of China Ltd. (3988) were among lenders that received funds, and the total was less than 400 billion yuan, the financial news website said. An ICBC spokesman declined to comment on the report, while a Bank of China Ltd. spokesman was unavailable.
“The PBOC did not inject liquidity across the board, so if any injections were made, they were likely explicitly targeted at specific banks facing liquidity problems,” Zhiwei Zhang, chief China economist at Nomura Holdings Inc. in Hong Kong, wrote in a report today. “We believe that recent action by the PBOC reflects the government’s determination to take aggressive action to contain financial risks.”
An intra-day gauge of the overnight repo rate touched a record 30 percent yesterday and was 9.27 percent as of 2:14 p.m. today in Shanghai. There were five transactions recorded yesterday after 3:30 p.m. at rates of 4.11 percent to 4.35 percent, while the average for the whole day was 13.94 percent, according to data compiled by Bloomberg. For seven-day contracts, there were five trades after 3:55 p.m. at rates of 4.72 percent to 4.75 percent, compared with the day’s average of 12.61 percent.
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 central bank may make open-market adjustments to keep “reasonable and stable” interbank liquidity, Financial News reported today, citing an unidentified analyst. China’s economic slowdown may deepen in the short term as policy makers pursue a prudent monetary policy to control financial risks, the report in the PBOC-controlled newspaper said.
The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repo rate, dropped 30 basis points to 4.40 percent in Shanghai, according to data compiled by Bloomberg. It reached an all-time high of 5.06 percent yesterday. The seven-day repo fixing, a gauge of interbank funding availability, has averaged 6.70 percent this month, the most in National Interbank Funding Center data going back to the start of 2004.
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 monetary authority has refrained from conducting reverse-repurchase agreements, which inject funds, since February. Bill and repo redemptions, which also add capital to the banking system, will decline to 25 billion yuan next week, from 32 billion yuan this week, according to data compiled by Bloomberg. Redemptions will total 46 billion yuan in the first two weeks of July, the data show.
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.
“Some smaller banks that are liquidity constrained will face higher funding costs,” analysts including Mike Werner at Sanford C. Bernstein and Co. in Hong Kong wrote in a report today. “They may need to offload assets at unfavorable prices if they fail to secure short-term funding.” Bernstein has underperform ratings on the shares of China Merchants Bank Co. (3968) and China Minsheng Bank Corp.
Industrial Bank Co. (601166), Ping An Bank Co. and Huaxia Bank Co. are all rated ‘b’ in terms of viability by Fitch Ratings, the 15th highest of 20 rankings. The grade suggests “highly speculative fundamental credit quality” with weak prospects, according to Fitch’s rating definitions. China Citic Bank Corp. and China Everbright Bank Co. (601818) are rated one step higher at ’b+’, according to a June 18 report by Fitch that showed Everbright Bank had the highest reliance on loan repayments to meet short-term cash obligations as of mid-2012.
Chinese regulators are forcing trust funds and wealth managers to shift assets into publicly traded securities as they seek to curb lending that doesn’t involve local banks, so-called shadow banking, according to Fitch.
The cash crunch brought about by the PBOC is “certainly a lot more swift and arguably more effective in reining in the growth of shadow credit but it does create a lot of repayment risk,” Charlene Chu, Fitch’s head of China financial institutions, said today on the sidelines of a conference in Sydney. “There is potential for unintended consequences and policy missteps.”
The cost of insuring China’s sovereign debt using five-year credit-default swaps increased 31 basis points, the most since November 2008, to 134 yesterday in New York, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market.
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