PBOC Faces Money-Market Stability Challenge for Chinese New Year

Updated on
China Welcomes New Year 2016

People dressed as monkeys perform for the upcoming new year.

Photographer: ChinaFotoPress via Getty Images
  • Some lenders said to have been set rate caps for repo funding
  • Seven-day repos done at 4.5% last week, highest since June

The People’s Bank of China is adding administrative orders to its toolbox to calm money markets amid record capital outflows and a surge in cash demand before Year of the Monkey celebrations.

The monetary authority told some banks to cancel repurchase agreements at interest rates it deemed excessive, people familiar with the matter said on Friday. It also advised some institutions to keep rates on the short-term loans below certain levels, they added. Seven-day repos were conducted on Wednesday at 4.5 percent, the highest level since June and double the rate the PBOC charges for similar funds in open-market operations.

“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 PBOC has used a variety of lending tools to inject more than 1.3 trillion yuan ($198 billion) into the financial system this month to keep borrowing costs from climbing amid the weakest economic growth in a quarter century. 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, adding to pressure caused by capital outflows that reduced the nation’s foreign-exchange reserves by more than $100 billion last month.

The runup to Chinese New Year holidays and quarter-end book closings are times of liquidity shortages that have often caused wild gyrations in money-market rates. The benchmark seven-day repo rate fell eight basis points to 2.26 percent on Monday, a weighted average from the National Interbank Funding Center shows. That’s the biggest drop this year. The overnight rate declined eight basis points to 1.95 percent, after transactions were recorded last week at levels as high as 5 percent.

Policy Goal

The central bank didn’t reply to a fax seeking comment on the guidance given to banks regarding their repo operations. 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.

The PBOC plans to inject about 1.6 trillion yuan before the coming holiday to meet seasonal demand, and arrange 600 billion yuan to 800 billion yuan of medium-term liquidity support, according to the transcript of a central bank meeting posted on Sina.com on Friday.

PBOC Assistant Governor Zhang Xiaohui told leaders of five of the nation’s biggest banks they had lent out too much cash in the first half of this month, more than 1.7 trillion yuan, and that they had to slow the lending, according to a report Sunday by the South China Morning Post citing minutes of a gathering of executives and PBOC officials.

The central bank also rejected calls from the biggest banks to inject more cash into the financial system by cutting the amount of cash major lenders must deposit at the PBOC from the current level of 17.5 percent, The Wall Street Journal reported Sunday. Doing so could add more downward pressure on the yuan, the paper reported, citing bank executives and the record of the meeting.

Stable Rates

Stabilizing short-term interest rates is a prerequisite in building a policy rate and ensuring transmission into the real economy, Ma Jun, chief economist of the PBOC’s research bureau, wrote in a Dec. 30 newspaper commentary. An interest-rate corridor target should be set and managed using open-market operations and existing lending facilities, he wrote.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was at 2.33 percent. That’s the same level as on Dec. 31, reflecting confidence in the PBOC’s ability to hold borrowing costs down.

“The PBOC obviously became less tolerant of money rates volatility this year,” said Nomura’s Leung. “On the one hand, it wants to move toward a price-based monetary policy framework by using the seven-day repo rate as the new benchmark. On the other hand, it also doesn’t want the market to see liquidity tightening as capital outflow has already become a hot topic.”

— With assistance by Sandy Hendry, Helen Sun, and Steven Yang

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