China Reins in Open-Market Operations as Longer-Term Cash Added

Updated on
  • A gauge of capital outflows rose to record last month
  • Overnight interbank repo transactions climb to new high

The People’s Bank of China scaled back cash injections in its open-market operations for the second week in a row, choosing instead to top up the banking system with longer-term funds.

The central bank cut its auction amount of seven-day reverse-repurchase agreements by half from last week’s, and granted 105.5 billion yuan ($16.6 billion) of six-month loans to commercial lenders via its Medium-term Lending Facility Wednesday. The economy expanded last quarter at the slowest pace since 2009, while a gauge of estimated capital outflows rose to a record in September.

“By offering six-month loans, the PBOC hopes to stabilize liquidity and guide financial institutions to put their money in the real economy,” said Chen Kang, a Shanghai-based fixed-income analyst at SWS Research Co., a unit of Shenwan Hongyuan Group Co.

The seven-day repurchase rate, a gauge of interbank funding availability, was steady at 2.38 percent in Shanghai, according to a weighted average from the National Interbank Funding Center. Transactions in the overnight repo rate climbed to a new all-time high of 2.2 trillion yuan on Wednesday.

Reserve Cuts

The PBOC sold 20 billion yuan of reverse repos on Thursday at a yield of 2.35 percent, bringing total issuance to 45 billion yuan this week. While a gauge of capital outflows compiled by Bloomberg climbed to a record of 194.3 billion yuan in September, the central bank drained a net 45 billion yuan from the banking system via open-market operations this week, after withdrawing 70 billion yuan a week earlier.

China’s economy expanded 6.9 percent last quarter from a year earlier, beating the median estimate in a Bloomberg survey for 6.8 percent growth. That’s below the PBOC’s full-year target of 7 percent, which was met in the second quarter.

The central bank will reduce the amount of cash lenders must set aside as reserves by another 50 basis points this year to 17.5 percent, according to the median estimate in a Bloomberg survey conducted in September. The benchmark one-year lending rate will be lowered to 4.35 percent from the current 4.6 percent.

The MLF offering alone won’t be able to ensure liquidity, and a reserve-requirement ratio cut in the middle of this month is very likely, analysts at Guosen Securities Co. led by Shanghai-based Dong Dezhi wrote in a report Thursday.

China’s government bonds rose, with the 10-year yield falling two basis points to 3.06 percent, according to prices from the National Interbank Funding Center. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was little changed at 2.40 percent.

— With assistance by Helen Sun

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