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Money-Market Rate in China Declines to a 13-Week Low; Yuan Little Changed
China’s benchmark money-market rate dropped to a 13-week low, prompting the central bank to withdraw cash from banks for a second week.
The seven-day repurchase rate, which measures interbank funding availability, slid one basis point to 1.68 percent, according to the National Interbank Funding Center. The rate, now at the lowest level since May 5, has declined for four weeks in a row. The People’s Bank of China has drained a net 84 billion yuan ($12.4 billion) this week after taking out 81 billion yuan last week. It injected funds in the eight previous weeks as the repo rate climbed to a 19-month high on June 2.
“Cash supply is relatively loose now following the central bank’s continuous fund additions,” said Chen Jianbo, a Beijing- based fixed-income analyst at BOC (China) Holdings, the investment-banking arm of Bank of China Ltd. “The PBOC will continue to drain money from the market in the third quarter to help contain inflation.”
China needs to remain alert to inflation risks, the central bank said in a July 27 statement. Rising labor costs and a return to increases in food prices are among reasons to be cautious, it said.
Open-Market Operations
Inflation, which eased to 2.9 percent in June, may climb above 3 percent in the next few months before falling at the end of this year, UBS economist Wang Tao wrote in a report this week.
Government bonds due in five years and less were little changed following a central bank auction of three-month bills and three-year bonds.
The central bank sold 85 billion yuan of three-year bills at 2.65 percent, unchanged from the previous sale two weeks ago. It issued 22 billion yuan of three-month securities at 1.5704 percent, unchanged for a fifth straight sale.
The yield on the 2.53 percent note due in June 2015 was 2.64 percent, and the price of the security was 99.52 per 100 yuan face amount, according to the China Interbank Bond Market data. A basis point is 0.01 percentage point.
Yuan forwards were little changed against the dollar on signs the central bank favors a stable currency as the economy slows and trading partners call for appreciation.
Daily Fixing
The monetary authority left the daily fixing at the same rate from yesterday for the first time since June 24. Yuan appreciation has slowed to 0.04 percent in July from 0.69 percent last month, the biggest increase in two years after the central bank ended its dollar peg on June 19. China’s decision to allow the yuan to strengthen against the dollar may fail to narrow the U.S. trade deficit unless the appreciation is substantial, according to the Federal Reserve of Cleveland.
“We won’t be seeing much movement in the yuan forwards as the spot is very range-bound,” said Peng Wensheng, head of China research at Barclays Plc in Hong Kong. “Domestically, the economy is slowing slightly but externally, the political pressure remains.”
The 12-month non-deliverable yuan forward was little changed at 6.6905 per dollar as of 2:57 a.m. in Hong Kong, according to data compiled by Bloomberg. The contract reflects bets the currency will advance 1.3 percent from the spot rate of 6.7761.
The currency’s daily reference rate was unchanged from yesterday at 6.7787. The yuan is allowed to trade 0.5 percent on either side of the fixing.
‘Tangible Risk’
Manufacturing data due in four days could jolt global markets by showing the first contraction in 17 months, according to analysts at Societe Generale SA and Westpac Banking Corp. Seasonal factors mean there is a “tangible risk” the government-backed Purchasing Managers’ Index for July will slip below 50 for the first time since February 2009, said Glenn Maguire, chief Asia economist for Societe Generale in Hong Kong.
The yuan isn’t undervalued, He Weiwen, director of the U.S.-China economic and trade research center at the University of International Business and Economics, wrote yesterday in the People’s Daily newspaper.
“A renminbi appreciation should raise the dollar price of Chinese goods, lower the renminbi price of U.S. goods, and whittle away at our trade deficit with that country,” Owen Humpage, a senior economist at the Cleveland Fed wrote in a research note published yesterday. “Still, unless the exchange rate moves by a substantial amount, we probably will not see much of an effect.”
--Belinda Cao, Patricia Lui. Editors: Sandy Hendry, Ven Ram
To contact Bloomberg News staff for this story: Belinda Cao in Beijing at +86-10-6649-7570 or lcao4@bloomberg.net Patricia Lui at +65-6499-2658 or plui4@bloomberg.net
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