PBOC Drains Funds Using Repos for First Time in 8 Months

People's Bank of China
The Chinese flag flies outside the People's Bank of China in Beijing. Photographer: Nelson Ching/Bloomberg

China’s central bank sold repurchase contracts for the first time since June, draining funds from the banking system as money-market rates sink to the lowest levels in at least three months.

The People’s Bank of China conducted 48 billion yuan ($7.9 billion) of 14-day repurchase contracts at 3.8 percent today, according to a statement posted on its website. The monetary authority last issued such contracts on June 6, when it sold 10 billion yuan of 28-day repos. Today’s rate is higher than both the 2.75 percent in the June auction and the 2.05 percent when the PBOC last issued 14-day repos in January 2011.

The seven-day repurchase rate, a gauge of funding availability in the banking system, fell eight basis points to 3.76 percent as of 5:02 p.m. in Shanghai, according to a weighted average by the National Interbank Funding Center. It touched 3.71 percent, the lowest since Nov. 13. The overnight rate dropped as much as 24 basis points to 2.63 percent, the lowest since May.

“The central bank needs to maintain funding costs at an appropriate level, and a seven-day repo below 4 percent isn’t normal,” said Huang Wentao, a Beijing-based bond analyst at China Securities Co. “The PBOC will probably continue repo operations and monetary policy will continue to be neutral-to-tight in the first two quarters.”

China’s 10-year bonds declined, with the yield on the 4.08 percent government bonds due August 2023 climbing four basis points, or 0.04 percentage point, to 4.56 percent, data from the National Interbank Funding Center showed. That’s the biggest gain since Jan. 23. The yield dropped to 4.49 percent on Feb. 13, the lowest since Dec. 4.

Rate Corridor

One-year interest-rate swaps based on the floating seven-day repo rate were unchanged at 4.84 percent, after climbing as much as four basis points, based on data compiled by Bloomberg.

“Today’s move showed the PBOC may be referring to an interest rate corridor in implementing its ‘prudent’ policy’,” said Wang Ming, marketing director at Shanghai Yaozhi Asset Management LLP, which oversees 2 billion yuan of fixed-income investments. “It hopes to keep market rates within a reasonable range, with the seven-day repo at about 4 percent to 8 percent.”

The PBOC asked lenders to submit orders for seven- and 14-day reverse repos, 28-day repos and 91-day bills while gauging demand yesterday, without including 14-day repos, said a trader at a primary dealer required to bid at the auctions. The central bank will sell 50 billion yuan of nine-month treasury deposits on behalf of the Ministry of Finance on Feb. 20, according to a statement posted on the website yesterday.

Volatile Rates

About 43 percent of respondents in a survey of 69 market participants expected repo operations by the PBOC today, compared with 57 percent who didn’t expect one as of yesterday, according to a note by Guotai Junan Securities Co. sent today.

Volatility in money-market rates will persist and borrowing costs will rise, the PBOC signaled in its fourth-quarter monetary policy report released Feb. 8. “When the valve of liquidity starts to tame and curb excessive credit expansion, money-market rates, or the cost of liquidity, will reflect that,” it said.

The draining of funds by the PBOC today comes as the Federal Reserve continues to cut its monthly stimulus, with Chair Janet Yellen saying on Feb. 11 that only a “notable change” in economic prospects would prompt policy makers to slow the pace of tapering. The U.S. central bank has reduced its purchases of Treasuries and mortgage debt to $65 billion a month, from $85 billion last year.

China’s stocks fell today, with the benchmark Shanghai Composite Index slipping 0.8 percent to 2,119.07. It closed at the highest level in two months yesterday. The Hang Seng China Enterprises Index declined 0.4 percent.

Hawkish Move

Conducting repos is “a hawkish move highlighting the central bank’s determination to tighten monetary policy via liquidity tools,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. The move indicates that “policy makers are uncomfortable with the recent decline in money-market rates and with the explosive growth of bank lending and other forms of social financing in January,” he said.

Aggregate financing, the broadest measure of credit, was 2.58 trillion yuan, exceeding the 1.9 trillion yuan median estimate in a Bloomberg survey and the previous high of 2.54 trillion yuan in January 2013, a Feb. 15 report showed.

The Ministry of Industry and Information Technology has lowered the growth target for industrial production this year to 9.5 percent from 10 percent in 2013, Deputy Ministry Mao Weiming said at a briefing today, according to a transcript posted on the website.

“It is appropriate to lower the goal as maintaining it would require excessive build-up of debt,” said Kowalczyk. “The reduction confirms our view that the overall GDP growth target will be cut.”

— With assistance by Helen Sun

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