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China Money Rate Drops to Nine-Month Low on Cash Flows, PBOC

Feb. 26 (Bloomberg) -- China’s benchmark money-market rate closed at the lowest level in nine months amid speculation the central bank was intervening to weaken the yuan, a policy that would boost the supply of the currency in the financial system.

The seven-day repurchase rate, a gauge of funding availability, dropped 12 basis points to 3.09 percent as of 4:30 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That was the lowest close since May 15. The yuan traded near a seven-month low in Shanghai after the People’s Bank of China set its daily reference rate at the weakest level since Dec. 20.

The PBOC’s yuan peg to the dollar means it has to buy the greenback and sell the local currency to engineer weakness, feeding funds into the banking system and driving down interest rates. The central bank asked lenders to submit orders today for 14- and 28-day repurchase agreements, which are used to drain cash, according to a trader at a primary dealer required to bid at the auctions. It also asked for inquiries for offering 14-day reverse repos and 91-day bills, the trader said.

“The amount of repos, compared with maybe a trillion yuan of cash returning to the banking system after the Lunar New Year holidays, is very limited,” said Gao Hui, a Beijing-based analyst at Founder Securities Co. “The PBOC may step up the draining of funds as short-term rates remain low. Its intention to weaken the yuan may have added further liquidity.”

Swaps Rise

The PBOC withdrew 100 billion yuan ($16.3 billion) from the market yesterday by selling 14-day repo contracts after taking out 108 billion yuan in the five days ended Feb. 21.

The seven-day repo rate dropped for a 12th day, the longest run of declines since July. The overnight repo climbed for a second day, adding three basis points, or 0.03 percentage point, to 1.74 percent.

One-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose three basis points to 4.52 percent, according to data compiled by Bloomberg. They dropped to 4.46 percent yesterday, the lowest since Nov. 27.

The spread between the two-year sovereign bond yield and the similar-maturity interest-rate swap, a gauge of financial stress, advanced to 121 basis points on Feb. 19, the widest in data going back to 2007.

Ten-year government notes fell for the first time in six days, with the yield on the 4.08 percent securities due August 2023 rising two basis points to 4.45 percent, data from the National Interbank Funding Center showed. The yield declined to 4.43 percent yesterday, the lowest level since Nov. 29.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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