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China Stocks Fall as PBOC Cash Fails to Stem Jump in Money Rates

Updated on
PBOC headquarters
A man walks past the People's Bank of China headquarters in Beijing. Photographer: Tomohiro Ohsumi/Bloomberg

China’s stocks declined and money-market rates climbed to the highest levels since July as the central bank’s first injection of funds in two weeks failed to alleviate a cash squeeze.

The People’s Bank of China conducted 13 billion yuan ($2.13 billion) of seven-day reverse-repurchase agreements today, according to a statement on its website. That compares with the 102.5 billion yuan drained from the banking system in the last two weeks as existing contracts matured and the monetary authority suspended sales of new agreements at a time when companies need funds to pay tax.

“The amount was very small and it was more about trying to inject confidence into the market,” said Guo Caomin, a bond analyst at Industrial Bank Co. in Shanghai. “We still believe beyond month-end that rates will quickly come down but, since the June crunch, big banks have become extremely cautious in lending.”

The Shanghai Composite Index fell 0.2 percent to 2,128.86 at the close. The seven-day repurchase rate, a gauge of funding availability in the banking system, increased seven basis points, or 0.07 percentage point, to 5 percent, according to a fixing by the National Interbank Funding Center. That is the highest level since July 30 and compares with a record 10.77 percent on June 20, when interbank rates surged amid concern some lenders would struggle to meet debt payments. The overnight repo rate jumped 22 basis points today to 4.68 percent.

Tax Payments

Today’s reverse repos were conducted at a yield of 4.1 percent, up from 3.9 percent when the agreements were last made available on Oct. 15. The cash injections were halted on Oct. 17, after the central bank offered seven- or 14-day contracts at twice-weekly auctions for about three months.

Corporate tax payments are the “main reason” for the current cash squeeze, according to Industrial Bank’s Guo. Policy makers are limiting the cash supply to help keep inflation in check as growth gathers pace in the world’s second-largest economy. Consumer prices increased 3.1 percent from a year earlier in September, the most since February, and gross domestic product rose in the third quarter at the fastest pace this year, official data show.

“Improving economic data and an acceleration of inflation don’t support the case for monetary policy to be kept loose,” said Shi Tongliang, a fixed-income analyst at China Securities Co. in Beijing.

PBOC Operations

The PBOC has used open-market operations as the main tool to adjust money supply since July 2012, when benchmark interest rates were last cut. It halted bill sales in June as interbank rates climbed to all-time highs and started weekly auctions of reverse-repo contracts in late July to add short-term funds to the financial system, while locking up long-term liquidity by rolling over some maturing three-year notes, including 5.9 billion yuan of the securities this week.

The Shanghai Composite fell as much as 1.9 percent today, after an earlier advance of 1.4 percent. The Hang Seng China Enterprises Index of mainland companies traded in Hong Kong climbed 1.3 percent, after rallying as much as 1.6 percent.

“We were rising in the morning because of the reverse repos, but after pricing that in, we have to note the market is still in a weak mode,” said Zhang Haidong, an analyst at Tebon Securities Co. in Shanghai. “Liquidity is still tight.”

The one-year interest-rate swap, the fixed payment needed to receive the floating seven-day repo, rose nine basis points to 4.19 percent. It earlier fell as much as two basis points. The yield on government bonds due August 2023 climbed two basis points to 4.24 percent, according to data from the Interbank Funding Center.

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