China’s benchmark money-market rate rose the most since June while the Shanghai Composite Index fell to a one-month low as policy makers drained cash from the financial system amid signs of a pickup in the economy.
The seven-day repurchase rate, a gauge of funding availability in the banking system, surged 65 basis points to 4.67 percent. The Shanghai Composite declined 0.9 percent to 2,164.32 at the close, with Bank of China Ltd. slumping 1.1 percent. The Hang Seng China Enterprises Index dropped 0.8 percent in Hong Kong, its third day of losses.
Policy makers are withdrawing liquidity as a recovery in the world’s second-largest economy sends inflation to the highest level since February and fuels the biggest jump in home prices since at least January 2011. Manufacturing strengthened more than economists estimated this month, a private report showed today.
“The market’s focus is on money-market rates now,” said Li Jun, a strategist at Central China Securities Co. in Shanghai. “Investors are worried the central bank may tighten monetary policies a bit after rising housing prices and inflation.”
The preliminary reading of 50.9 for a Purchasing Managers’ Index compiled by HSBC Holdings Plc and Markit Economics compared with the 50.4 median estimate in a Bloomberg News survey. Readings above 50 indicate expansion.
Money rates jumped after the People’s Bank of China refrained from conducting reverse repos for a third straight auction. The PBOC drained a net 58 billion yuan ($9.5 billion) from the financial system this week as reverse repos matured, said Chen Long, an analyst at Bank of Dongguan. It withdrew 44.5 billion yuan last week, data compiled by Bloomberg show.
The overnight repo rate increased 27 basis points, or 0.27 percentage point, to 4.07 percent. The yield on China’s 4.08 percent bonds due August 2023 rose seven basis points to 4.22 percent. The yuan touched a 20-year high of 6.0813 per dollar.
Higher money-market rates raised concern that policy makers are tightening liquidity to curb credit growth. The pressure for monetary and credit expansion is still large as the trade surplus widens and capital flows in, the central bank said in an Oct. 16 statement. There is ample liquidity in the banking system and the monetary authority will follow a “prudent” monetary policy, according to the statement.
Overnight rates “are likely to continue to see further pressure,” Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong, wrote in a note today. “Tighter liquidity conditions and an appreciating currency reflect a more hawkish monetary dynamic.”
Hao Hong, the Bocom International Holdings Co. strategist who predicted the second-half rally in Chinese stocks, now advises paring holdings on concern economic data will trail estimates as the central bank tightens policy.
“It is time to lock in the gains,” Hong wrote in an e-mailed note. “Growth expectations have been revised up since the market capitulation in late June, and are now running ahead of themselves.”
The CSI 300 Index lost 0.7 percent to 2,400.51, extending losses to a third day. China Citic Bank Corp. slumped 1.3 percent while Poly Real Estate Group Co., the nation’s second-biggest property developer, lost 1.8 percent.
The Shanghai Composite trades at 8.5 times projected profit for the next 12 months, compared with the seven-year average of 15.4, according to data compiled by Bloomberg.
The index has rebounded 11 percent from its four-year low on June 27 amid speculation the government will take reform measures to sustain long-term economic growth. President Xi Jinping said China will discuss deepening reforms at a meeting of the Communist Party next month, China Central Television reported.