China's Cash Injections Only Replaced Yuan Mopped Up by Intervention

Updated on
  • Central bank comfortable with money-market rates, says analyst
  • Reserve-ratio cut lessens need for more funds to be added

Cash injections by China’s central bank in August did little more than replace yuan the authority was buying to prop up the exchange rate, suggesting borrowing costs are as low as policy makers want them to be.

The People’s Bank of China added a net 660 billion yuan ($103 billion) to banks last month using short- and medium-term lending tools, according to data compiled by Bloomberg. That’s comparable in size to the record $94 billion drop in foreign-exchange reserves reported this week, an indication of the amount of dollars sold in August to support the yuan following a surprise devaluation. The need for injections has eased this week after a cut in lenders’ reserve requirements took effect Sept. 6.

China is trying to give market forces greater sway in its economy, while at the same time seeking to limit the impact of changes on its financial markets. Intervention to back the yuan sucks money out of the banking system and risks driving funding costs higher, a situation that Premier Li Keqiang can ill afford as he works to achieve a 7 percent economic growth target for this year.

“The injections were aimed at offsetting the currency intervention,” said Wan Zhao, a Shanghai-based analyst at China Merchants Bank Co. “As the PBOC considers money rates to be at appropriate levels, it would refrain from adding too much cash that could add further pressure on the currency.”

Funding Costs

China’s benchmark seven-day repurchase rate, a gauge of interbank funding availability, fell four basis points to 2.37 percent as of 4:37 p.m. in Shanghai on Wednesday, according to a weighted average from the National Interbank Funding Center. That compares with an average of 2.47 percent so far this quarter. The overnight rate was little changed at 1.87 percent.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was steady at 2.47 percent, data compiled by Bloomberg show. The yield on 10-year government bonds rose two basis points to 3.37 percent, National Interbank Funding Center prices show. China’s 10-year sovereign yield averaged 3.59 percent in the past 12 months.

The yuan slid 2.6 percent in August, the most in two decades, as the central bank devalued the currency on Aug. 11 and said it was adopting a more market-based methodology to determine a reference exchange rate it announces each day. Moves in the currency are limited to 2 percent on either side of the PBOC’s fixings, which have had daily moves of less than 0.1 percent so far this week.

Reduced Pressure

The supply of cash in the banking system has increased with the cut in lenders’ reserve-requirement ratios that took effect on Sunday. Bloomberg Intelligence chief Asia economist Tom Orlik estimated the move, the third reduction this year, would unleash 650 billion yuan.

“The pressure on the PBOC will ease a little bit this month as it is trying to re-anchor market expectation by stable fixings,” said Xu Gao, Beijing-based chief economist at China Everbright Securities Co. “Another RRR cut is likely this month to offset capital outflows.”

The PBOC injected a net 210 billion yuan via open-market operations in August, 340 billion yuan using Short-term Liquidity Operations and 110 billion yuan of loans through Medium-term Lending Facility.

“It is no accident that the decline in China’s foreign-exchange reserves roughly matched the amount of liquidity injections,” said Tim Condon, Singapore-based head of Asia research at ING Groep NV. “We expect the PBOC to stabilize the yuan fixings in a narrow range for an extended period in hopes of reducing depreciation expectations.”

For more, read this QuickTake: The People’s Currency

— With assistance by Helen Sun

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