PBOC Steps Up Cash Injections Before Holiday as Rates Increase

  • Open-market operations added a net 40 billion yuan this week
  • Seven-day repo rate climbs by the most in seven weeks

China’s central bank stepped up cash injections as a benchmark money-market rate climbed the most in seven weeks in the run-up to a weeklong holiday.

The People’s Bank of China added 80 billion yuan ($12.5 billion) to the financial system on Thursday using 14-day reverse-repurchase agreements, double the 40 billion yuan supplied via seven-day contracts a week ago. Open-market operations injected a net 40 billion yuan for the week. The tenor of reverse repos auctioned was changed as China’s financial markets will be closed Oct. 1-7 for the National Day holiday.

The seven-day repurchase rate, a gauge of interbank funding availability, rose 12 basis points to close at 2.46 percent in Shanghai, based on a weighted average from the National Interbank Funding Center. While that’s the biggest one-day gain since Aug. 7, the rate is still below the past year’s average of 3.18 percent. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was steady at 2.48 percent.

More reverse repos were offered “to meet increased cash demand before the National Day holiday," said Li Miaoxian, a Beijing-based analyst at Bocom International Holdings Co. "The amount of the injection isn’t that huge as money-market rates remain at quite low levels."

The government will further cut its economic expansion target to between 6.5 percent and 7 percent for 2016, according to eight of 15 economists in a Bloomberg News survey conducted Sept. 17-22. Four said they expect a 6.5 percent goal. China’s manufacturing is contracting at the fastest pace in six
years, a preliminary Purchasing Managers’ Index showed on Wednesday.

China has lowered interest rates five times since November in an attempt to revive an economy that’s expanding at the slowest pace since 1990. The yield on government bonds due July 2025 slipped two basis points to 3.32 percent in Shanghai, according to Chinabond data.

The yuan rose 0.04 percent versus the dollar, trimming its loss for the quarter to 2.8 percent. The PBOC has been limiting declines in the exchange rate by selling dollars and buying yuan, a policy that can strain supplies of the local currency unless offsetting amounts of cash are injected.

"The poor data exerted greater depreciation pressure on the yuan and could trigger more intervention by the PBOC," Qu Qing, a Beijing-based analyst at Huachuang Securities Co., wrote in a note. "That could lead to more volatile liquidity conditions."

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