China’s overnight money-market rate rose to the highest level since April on speculation intervention by the central bank to support the currency will drain liquidity.
The People’s Bank of China bought yuan last week to stabilize the exchange rate in the wake of an Aug. 11 devaluation and said it would step in to curb large fluctuations. Interbank rates increased even as the PBOC pumped in 120 billion yuan ($18.8 billion) into the financial system Tuesday via the biggest offering of seven-day reverse-repurchase agreements since January 2014.
“Yesterday’s reverse repo hasn’t proved to be very effective,” said Chen Kang, a Shanghai-based analyst at SWS Research Co., a unit of Shenwan Hongyuan Group Co. “The PBOC is likely to increase reverse repos or cut reserve-requirement ratios to alleviate the short-term pressure on liquidity.”
The overnight repurchase rate, a gauge of liquidity in the banking system, rose by the most in three weeks, adding five basis points to 1.78 percent as of 4:37 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That’s the highest level since April 24. The seven-day repo rate increased three basis points to 2.53 percent, the highest since July 23.
The PBOC injected a total of 110 billion yuan into 14 financial institutions via its medium-term lending facility on Wednesday, it said in a statement. The loans were for six months at an interest rate of 3.35 percent, it said.
China’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 of strategists and traders.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was little changed at 2.58 percent, data compiled by Bloomberg show.
The yield on 10-year sovereign bonds due July 2025 increased three basis points to 3.54 percent, according to National Interbank Funding Center prices.
The Ministry of Finance auctioned 30 billion yuan of seven-year notes at 3.50 percent, according to China Central Depository & Clearing Co. That compared with the median estimate of 3.49 percent in a survey Tuesday.
— With assistance by Helen Sun