China Money Rate Drops to Two-Month Low as More PBOC Easing Seen

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China’s benchmark money-market rate fell to a two-month low on speculation the central bank will lower interbank rates to compensate for the impact of compulsory deposit insurance.

An insurance system for bank deposits will start May 1, as China moves toward scrapping the remaining controls on interest rates, according to a statement posted on the central government’s website on Tuesday. The statement didn’t specify what level of premiums banks will have to pay. The total amount may be about 20 billion yuan ($3.2 billion), according to a research note by Yu Pingkang, an economist at Huatai Securities Co. in Shenzhen.

“The PBOC may deliver further monetary easing measures to coincide with the launch of the scheme to ensure a smooth transition,” Qu Hongbin, a Hong Kong-based economist at HSBC Holdings Plc, wrote in a report Wednesday. The bank predicts an additional 50 basis points of cuts to the policy rate and a 200 basis-point reduction in lenders’ reserve ratios this year.

The seven-day repurchase rate, a gauge of interbank funding availability, fell 11 basis points to 3.71 percent as of 4:45 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. It touched 3.63 percent earlier, the lowest since Jan. 20.

If interbank interest rates were to remain notably above deposit rates, as is the case now, a removal of the deposit-rate ceilings could significantly push up the latter, tightening overall financial conditions, economists MK Tang and Yu Song at Goldman Sachs Group Inc. wrote in a research note Tuesday. Therefore, the PBOC will continue guiding the seven-day repo rate lower in coming months toward 3.25 percent by year-end, they wrote.

Swaps, Bonds

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, declined 18 basis points to 3.37 percent, according to data compiled by Bloomberg.

The official manufacturing Purchasing Managers’ Index was 50.1 last month, from 49.9 in February, the government said on Wednesday. Numbers above 50 indicate expansion. The final PMI from HSBC Holdings Plc and Markit Economics for March was 49.6, up from a preliminary reading of 49.2, a separate report showed.

The yield on the sovereign bonds due September 2024 dropped six basis points, or 0.06 percentage point, to 3.60 percent, according to prices from the National Interbank Funding Center.

— With assistance by Helen Sun

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