China’s central bank pumped more money into its financial system than any time since February this week, underscoring how moves to protect the yuan have strained the supply of cash.
The People’s Bank of China injected a net 150 billion yuan ($23 billion) in open-market operations, according to data compiled by Bloomberg. That’s the most since before the Chinese New Year holiday, when seasonal demand for cash typically jumps. The authorities are providing a further 170 billion yuan through loans and an auction of deposits.
China surprised investors by devaluing the yuan last week, shifting to a more market-oriented exchange rate. Under the new system, PBOC intervention has partly replaced the daily reference rate’s role in guiding currency moves. Yuan purchases risk driving borrowing costs higher at a time of slowing economic growth unless the monetary authority releases additional cash.
“Front-end rates have been edging up, likely resulting from tighter liquidity conditions amid intervention,” said Frances Cheung, head of Asia ex-Japan rates strategy at Societe Generale SA in Hong Kong. “The PBOC needs to step up its open-market operations to offset the liquidity withdrawal on the foreign-exchange side.”
Authorities have to strike a balance between boosting exports and satisfying the International Monetary Fund’s requirements for the yuan to obtain reserve status, while at the same time ensuring financial stability.
The overnight repurchase rate, a gauge of liquidity in the banking system, rose three basis points to 1.81 percent as of 4:16 p.m. in Shanghai, according to a weighted average from the National Interbank Funding Center. That was the highest since April 23.
The yuan fell 3 percent in three days last week after the PBOC cut its daily reference rate by 1.9 percent on Aug. 11. In the following sessions, the onshore spot price in Shanghai followed a pattern of rallies toward the close, sparking speculation the authorities were intervening.
“After two days of adjustment, accumulative depreciation pressure of 3 percent has already released,” PBOC Assistant Governor Zhang Xiaohui said at an Aug. 13 press conference. “The difference between the yuan’s fixing and spot has been corrected.”
Intervention will result in a drop of $40 billion a month in China’s foreign-exchange reserves for the rest of this year, according to the median of 28 estimates in a Bloomberg survey.
On the day of the initial devaluation, the PBOC said that market makers who submit contributing prices for the yuan’s daily fixing must now consider the previous day’s close, foreign-exchange demand and supply, as well as changes in major currency rates. The fixing limits onshore moves to a maximum 2 percent on either side.
The IMF, which has welcomed the bigger role for market forces, said Wednesday that it is delaying the expansion of the reserves basket to September 2016. IMF staff had in July recommended the extension to minimize disruption if the agency decides to add the yuan at a review in November this year.
The yuan reversed an earlier decline to rise 0.05 percent to 6.3925 per dollar in Shanghai on Thursday, according to China Foreign Exchange Trade System prices. The PBOC’s fixing was strengthened 0.08 percent to 6.3915. In Hong Kong’s offshore market, the freely traded yuan fell 0.08 percent to 6.4463. At least three major Chinese banks were seen selling dollars in the onshore market, according to a trader.
The PBOC auctioned 120 billion yuan of seven-day reverse-repurchase agreements on Thursday, the same as Tuesday, as 90 billion yuan of the contracts matured this week. It will auction another 60 billion yuan of three-month deposits on behalf of the Ministry of Finance on Aug. 25, according to a statement on the ministry’s website. The authority provided 110 billion yuan of six-month loans to 14 financial institutions Wednesday via its Medium-term Lending Facility with an interest rate of 3.35 percent.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose two basis points to 2.6 percent, data compiled by Bloomberg show. The PBOC will have to cut banks’ reserve-requirement ratios by a total of 100 basis points by year-end if it wants to keep the rate at around 2.5 percent, said SocGen’s Cheung.
For more, read this QuickTake: China’s Managed Markets
— With assistance by Helen Sun