The People’s Bank of China tripled the amount of cash added to the financial system in its open-market operations, helping to ensure an adequate supply of funds as it supports the yuan following last week’s devaluation.
The central bank conducted 120 billion yuan ($18.8 billion) of seven-day reverse-repurchase agreements, up from 40 billion yuan on Thursday, according to a statement on its website. That compares with 50 billion yuan of contracts that matured Tuesday and was the largest offering of reverse repos since late January
2014. The interest rate on Tuesday’s reverse repos was kept unchanged from last week at 2.5 percent.
“As the PBOC tries to stabilize markets, keeping liquidity ample to ensure proper functioning in the domestic financial system is essential,” said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore. “The recent devaluation of the yuan has sparked speculation that further weakness is in store over the medium term.”
Central bank intervention to prop up the yuan removes funds from the financial system and risks driving borrowing costs higher unless the monetary authority releases additional cash. The nation’s foreign-exchange reserves are expected to drop by some $40 billion a month for the rest of this year as the central bank buys the Chinese currency, based on the median of 28 estimates in a Bloomberg survey.
China may cut banks’ reserve-requirement ratios as liquidity tightens amid expectations for a weaker yuan, according to a front-page commentary in the China Securities Journal Tuesday. Increases in the interbank money rate, drops in excess reserve levels at banks and a decrease in yuan positions will pressure cash supply, according to the article.
“The more intervention in the currency market, the tighter the money market will be,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “If the PBOC injects too much, the market will worry about further devaluation pressure. It’s a balancing act.”
The overnight repurchase rate, a gauge of liquidity in the interbank market, rose four basis points to 1.73 percent as of 4:30 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That’s the highest level since April 28. The seven-day repo rate climbed two basis points to a three-week high of 2.50 percent.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell one basis point to 2.57 percent, data compiled by Bloomberg show. The contracts rose five basis points Monday.
— With assistance by Helen Sun