China’s benchmark money-market rate dropped the most in five months and the yuan weakened in offshore trading after the central bank cut borrowing costs and relaxed reserve requirements for some lenders.
The seven-day repurchase rate sank 24 basis points to 2.69 percent as of 4:32 p.m. in Shanghai, a weighted average shows. Interest-rate swaps fell and bonds were little changed. The yuan retreated 0.05 percent to 6.2091 per dollar in Hong Kong. Currencies declined across emerging markets as the increased risk of Greece leaving the euro bolstered demand for the greenback and the Japanese yen.
The People’s Bank of China lowered its benchmark rates for the fourth time since November, announcing the move after the Shanghai Composite Index of shares tumbled 19 percent over the last two weeks. Policy makers have resisted letting the yuan weaken this year, a move that would help boost exports, as they encourage greater global use of the currency in a push to win reserve-currency status at the International Monetary Fund.
“The PBOC’s rate cuts added funds to the market,” said Wang Ju, a senior currency strategist at HSBC Holdings Plc in Hong Kong. “The central bank will keep monetary policy loose. We believe it will cut interest rates by 25 basis points and reserve-ratio requirements by 200 basis points by year-end, adding mild depreciation pressure to the yuan.”
The central bank lowered its one-year lending rate by 25 basis points to a record 4.85 percent. The one-year deposit rate was cut by a similar amount to 2 percent, while reserve requirements for some smaller lenders were eased. The supply of cash in the financial system remains abundant and so there wasn’t a need to unlock reserves for all banks, the PBOC said.
The selective reserve-ratio cut will free up some 400 billion yuan ($64.4 billion), Haitong Securities Co. estimated.
“The PBOC’s move signaled that it’ll stick with a loose monetary policy for the rest of 2015,” said Xie Yaxuan, Shenzhen-based chief economist at China Merchants Securities Co. “It might cut reserve requirements twice and interest rates at least once by year-end. These moves will challenge the yuan and keep the money-market rates low.”
The seven-day repo rate, a gauge of interbank funding availability, declined for the first time in 14 days. The one-year interest-rate swap, the fixed payment to receive the floating seven-day repo rate, dropped six basis points to 2.45 percent. The yield on sovereign bonds due April 2025 was steady at 3.62 percent, while the Shanghai Composite slid 3.3 percent.
Chinese regulators are considering suspending initial public offerings to help stablize the stock market, people familiar with the matter said on Monday. Subscriptions for 28 upcoming IPOs on the mainland were expected to tie up 4.03 trillion yuan of funds starting early July, according to the median estimate of six analysts surveyed by Bloomberg.
The yuan rose 0.01 percent to close at 6.2087 per dollar in onshore trading, according to China Foreign Exchange Trade System prices. The currency’s drop in Hong Kong, where it trades freely, was the biggest since June 12 and came about after Greece’s government moved the nation a step closer to leaving the euro by effectively asking voters to decide on its membership.
“The Greek situation is the main driver” of the yuan’s drop, said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “It’s also because of the interest-rate cuts in China, making it less bullish for the yuan. The interest-rate differential has narrowed.”
— With assistance by Fion Li, and Tian Chen