China Money Rate Drops on Capital Inflows Outlook; Bonds Advance

China’s money-market rate dropped this week on speculation yuan appreciation will attract more capital and as cash returned to the banking system after the completion of a corporate bond offering.

The government expanded its Renminbi Qualified Foreign Institutional Investors program this month, which allows offshore yuan to be invested on the mainland. Sovereign bonds advanced as China Minsheng Banking Corp. closed its 20 billion yuan ($3.2 billion) sale of convertible notes this week and returned cash from unsuccessful bids. China’s currency reached a 19-year high against the dollar on March 20.

“There’s a possibility of capital inflows and we do expect the PBOC to continue to mop them up,” said Tommy Xie, who covers China’s economy at Oversea-Chinese Banking Corp. in Singapore. “Confidence in yuan appreciation is back.”

The seven-day repurchase rate, which measures interbank funding availability, dropped 43 basis points, or 0.43 percentage point, to 2.93 percent as of 11:27 a.m. in Shanghai from a week ago, according to a weighted average compiled by the National Interbank Funding Center.

Foreign direct investment rose 6.3 percent in February from a year earlier, the first increase in nine months, the government said on March 19.

The People’s Bank of China drained 47 billion yuan from the financial system this week through repurchase operations, bringing total net withdrawals to 1 trillion yuan in the past five weeks.

China Minsheng’s bond sale locked up 450 billion yuan of funds from bidders, according to an estimate by Guotai Junan Securities Co. The government sold 22 billion yuan of 10-year securities at 3.5198 percent on March 20.

The yield on the 3.52 percent sovereign notes due February 2023 dropped two basis points to 3.57 percent from a week ago, according to the Interbank Funding Center.

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, was unchanged at 3.28 percent from March 15, data compiled by Bloomberg show.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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