China’s central bank is expected to keep draining funds from the financial system this month using repurchase contracts as the benchmark money-market rate sinks to the lowest level in more than a year, a Bloomberg survey shows.
The People’s Bank of China absorbed a net 1.036 trillion yuan ($167 billion) in the eight weeks since the Lunar New Year holiday by selling repo agreements. Open-market operations take place on Tuesdays and Thursdays and the contracts are likely to be sold throughout April, according to 11 of 19 analysts and traders surveyed by Bloomberg. The seven-day repo rate, a gauge of banks’ willingness to lend, will average 3.8 percent this quarter, the least since the first three months of 2013, based on the median estimate in the poll.
“Liquidity will be relatively loose in April as is usually the case for the beginning of the quarter, so the central bank will continue to pull out cash from the market,” said Li Ning, a Shanghai-based bond analyst at Haitong Securities Co. “Banks are willing to lend to each other at the moment, as they don’t expect any tightness in the foreseeable future.”
The central bank sold 90 billion yuan of 14- and 28-day repurchase agreements today, after issuing 72 billion yuan of the contracts on April 1. The contracts involve short-term sales of securities by the PBOC to financial institutions.
Premier Li Keqiang said on March 26 that China will use a variety of monetary policy tools to lower companies’ financing costs at a time of “difficulties and risks” in the economy. The government is trying to strike a balance between sustaining growth and preventing credit risks in certain industries and regions from spreading through the financial system.
The seven-day repo rate averaged 4.04 percent in the three months ended March 31, down from a record 4.67 percent in the prior quarter, according to fixings from the National Interbank Funding Center. It fell 11 basis points, or 0.11 percentage point, to 4.12 percent today.
The rate sank to 2.22 percent on March 12, the lowest since May 2012, amid speculation the central bank was stepping up intervention to weaken the yuan. Purchases of dollars by the PBOC boost the availability of China’s currency in the financial system. The yuan weakened 2.6 percent versus the dollar in the first quarter, Asia’s biggest loss and its steepest slide in two decades.
Shanghai Chaori Solar Energy Science & Technology Co. in March became the first issuer to default in China’s domestic bond market and the government is targeting economic growth of 7.5 percent this year, which would be the slowest expansion since 1990.
The State Council outlined a package of policies yesterday from railway construction to tax relief for small companies and shantytown redevelopment after a meeting led by Li, according to a statement on the central government’s website.
“We expect the economy to rebound in the second quarter, so there is little chance for the PBOC to loosen monetary policy aggressively,” said Zuo Junyi, a Beijing-based fixed-income analyst at Founder Securities Co.