China Money Rate Jumps as Reserve Limits Hit Preferential Banks

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Chinese Stocks Tumble Most in a Month
  • PBOC's market liquidity operations allow net cash withdrawal
  • Limited reaction in bonds to rule scrapping investment quotas

China’s overnight money rate climbed by the most since the Lunar New Year holiday as some banks were obliged to set aside more funds as reserves at a time when open-market operations are draining cash from the financial system.

Effective Thursday, the People’s Bank of China normalized reserve requirements for some lenders that had been assigned preferential terms. The monetary authority has added 580 billion yuan ($88.8 billion) to the financial system this week via auctions of seven-day reverse-repurchase agreements, less than the 960 billion yuan of contracts that mature through Friday.

“The change in reserve ratios may have prevented some banks from lending actively in the interbank market,” said Yan Yan, a Shanghai-based analyst at China Guangfa Bank Co. “Compared with the huge amount of reverse repos that will mature, the central bank’s new issuance is quite small.”

The overnight repurchase rate, a gauge of liquidity in the financial system, rose 14 basis points to 2.12 percent, according to a weighted average from the National Interbank Funding Center. That’s the biggest increase since Feb. 6, the day before the week-long Lunar New Year break began. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose two basis points to 2.33 percent, data compiled by Bloomberg show.

Bond Rules

In the bond market, there was little reaction to China’s unprecedented move to open up debt investment to foreigners. Institutions including commercial lenders, insurance companies, securities firms and asset managers, as well as charities and pension funds, can now trade in the market without seeking prior approval, removing the previous quota system, the central bank said on Wednesday.

“Ultimately, it spells a more efficient allocation of capital, which will be good for the Chinese economy over the long term,” said Adam McCabe, Singapore-based head of Asian fixed income at Aberdeen Asset Management Plc. “It will lead to an opening in the capital account.”

The yield on the new 10-year government notes issued in January was steady at 2.89 percent, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

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