China’s benchmark money-market rate climbed for a seventh day and interest-rate swaps increased as banks hoarded cash to meet year-end regulatory requirements.
The seven-day repurchase rate, a gauge of funding availability in the banking system, jumped 124 basis points today to 8.84 percent, the highest level since June 20, according to a daily fixing from the National Interbank Funding Center. The rate, which has more than doubled from 4.37 percent in the past week, touched a record 10.77 percent in June.
“Banks’ cash demand to meet regulatory requirements by year-end will mean rates may stay elevated for another week or so,” said Yang Kun, a Shanghai-based analyst at Guotai Junan Securities Co. “The market is still waiting to see whether the PBOC will inject cash via reserve repos at tomorrow’s regular operations.”
Citic Securities Co. and Guotai Junan, two of China’s three biggest securities firms by assets, predict the central bank will refrain from using open-market operations to inject funds this week. There will likely be a “limited” amount of reverse-repurchase contracts offered at tomorrow’s auction, said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the second-largest brokerage.
The People’s Bank of China has refrained from offering reverse repos in its Tuesday and Thursday money-market operations for almost three weeks, the longest pause since July.
The monetary authority is instead tackling the cash crunch using short-term liquidity operations that supply funds to unnamed banks and said Dec. 20 more than 300 billion yuan ($49 billion) was added in three days. The banking system’s excess reserves exceed 1.5 trillion yuan, a historically high level for this period of the year, the PBOC advised.
The one-year interest-rate swap, the fixed payment needed to receive the floating seven-day repo rate, increased three basis points to 5.08 percent as of 4:43 p.m. in Shanghai. It earlier touched 5.13 percent, the highest in Bloomberg data going back to 2006.
“Seasonal factors, coupled with a delay of fiscal fund transfers from the central bank, fueled the market concern, leading to a spike of the rates,” said Chen Peng, a Shenzhen-based analyst at Fortune Securities Co. China’s central government usually allots funds to local administrations at year-end, boosting the availability of cash at commercial banks.
The reluctance to use open-market operations reflects the central bank’s belief there is still ample liquidity in the financial system given capital inflows and the likelihood of sizable fiscal deposits in coming days, Barclays Plc economists Jian Chang and Jerry Peng wrote in a note dated Dec. 21.
China’s net capital inflows amounted to $110 billion in the last three months, according to a Bloomberg estimate, as the yuan appreciated 0.4 percent. The currency has strengthened 0.4 percent this month, a performance second only to India’s rupee in Asia, and closed today at a 20-year high of 6.0702 per dollar in Shanghai.
The central bank asked lenders to submit orders today for 91-day bills, 28-day repurchase agreements, as well as seven-day and 14-day reverse repurchase contracts as usual before tomorrow’s auction window, according to a trader at a primary dealer required to bid at the sales.
The yield on the 4.08 percent government bonds due August 2023 fell three basis points to 4.6 percent, according to the Interbank Funding Center. The 10-year yield reached 4.72 percent on Nov. 20, the highest in ChinaBond data going back to September 2007.