- Some lenders said to have been set rate caps for such loans
- Seven-day repos recorded at 4.5% this week, highest since June
The People’s Bank of China is ordering banks to keep a lid on lending rates charged to one another as it seeks to prevent a pre-holiday surge in demand for funds leading to a cash crunch at a time of record capital outflows.
The monetary authority told some banks to cancel repurchase agreements that were conducted at interest rates it deemed excessive, according to people familiar with the matter, who asked not to be identified because the information is private. It also advised some institutions to keep rates on the short-term loans below certain levels, though not all parties were given the same limit, they said. Seven-day repos were conducted on Wednesday at 4.5 percent, the highest level since June and double the rate that the PBOC charges for similar term funds in its open-market operations.
The directives come at a time when the PBOC is flooding the financial system with money to keep borrowing costs from climbing amid the weakest economic growth in a quarter century. Using a variety of lending tools, the authority has injected more than 1.3 trillion yuan ($198 billion) into the financial system this month. Capital outflows were an estimated$97 billion in December, according to Goldman Sachs Group Inc., and Guotai Junan Securities Co. sees cash demand growing by about 3 trillion yuan in the run-up to the week-long Chinese New Year holiday starting Feb. 8.
“The huge liquidity injections and administrative measures indicate the central bank’s determination to tame the money rates,” said Qi Gao, a Hong Kong-based strategist at Scotiabank. “So it looks like the money market will be able to remain largely stable ahead of the holidays, and there’s no reason to panic.”
The benchmark seven-day repo rate fell eight basis points to 2.34 percent on Friday, a weighted average from the National Interbank Funding Center shows. That’s the biggest drop this year. The overnight rate declined six basis points to 2.03 percent, after transactions were recorded this week at levels as high as 5 percent.
The central bank didn’t immediately reply to a fax seeking comment regarding whether it had asked lenders to cancel certain repo agreements and on its guidance on maximum rates for such loans. It has so far this month injected a net 612.5 billion yuan through its Medium-Term Lending Facility, 150 billion yuan via Short-Term Liquidity Operations and 545 billion yuan in open-market operations. In addition, it auctioned 80 billion yuan of nine-month treasury deposits on behalf of the Ministry of Finance.
China’s money-market rates usually increase before a long holiday and at quarter-end as lenders hoard funds to meet cash demand and regulatory checks. Last year, the central bank added 1.07 trillion yuan to the financial system before Chinese New Year, according to Bloomberg Intelligence, as the weighted average seven-day repo rate spiked to 4.87 percent.
“It is one of the PBOC’s priorities to stabilize interbank rates ahead of the Chinese New Year,” said Albert Leung, a Hong Kong-based rates strategist at Nomura Holdings Inc. “They don’t want to see a liquidity squeeze like they had in previous years.”
The central bank plans to arrange 1.6 trillion yuan of short-term liquidity support as well as 600 billion to 800 billion yuan of medium-term funds over the Chinese New Year holidays, according to the transcript of a PBOC meeting held with lenders posted on Sina.com. The monetary authority will inject liquidity via various lending facilities instead of cutting reserve-requirement ratios, according to the transcript.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose one basis point to 2.31 percent, data compiled by Bloomberg show. The yield on sovereign bonds due October 2025 was steady at 2.78 percent, according to National Interbank prices.
— With assistance by Helen Sun, and Steven Yang