Citic Sees PBOC Staying Out of Market to Curb Debt: China Credit
Two of China’s three biggest securities firms predict the central bank will refrain from using open-market operations to inject funds this week as policy makers seek to rein in debt and contain inflation.
Citic Securities Co., the largest brokerage by assets, said government spending will ease a cash squeeze that drove the benchmark money-market rate up last week by the most since January 2011. Guotai Junan Securities Co., ranked third, said the supply of funds directly to banks alleviates the need for auctions of reverse-repurchase agreements. The monetary authority has suspended offerings of the latter for almost three weeks, the longest pause since July.
Concern about rising borrowing costs drove the Shanghai Composite Index (SHCOMP) of shares down for a 10th day today, the longest losing streak since 1991. The People’s Bank of China said Dec. 19 it was supplying short-term finance to selected banks, an announcement that failed to prevent interbank lending rates from rising to the highest levels since a record cash crunch in June.
“The PBOC chose an unofficial, non-public method rather than open-market operations to avoid conveying the message that it was going to loosen monetary conditions,” said Cici Wang, a Beijing-based fixed-income analyst at Citic Securities. “Their attitude hasn’t changed.”
The seven-day repurchase rate, a gauge of liquidity in the financial system, jumped 100 basis points on Dec. 20 to 7.60 percent in Shanghai, capping a weekly gain of 328 basis points, according to fixings by the National Interbank Funding Center. That’s the highest level since June’s funding squeeze drove the rate to a record 10.77 percent.
The first five seven-day repo transactions reported today had rates ranging from 5.57 percent to 9.80 percent, with a weighted average of 8.47 percent. The Shanghai Composite Index slid 0.5 percent as of 10:11 a.m. local time, set for its lowest close in four months.
The PBOC said on its Twitter-style Weibo account on Dec. 19 that it had released an undisclosed amount of funds into the interbank market via “short-term liquidity operations,” or SLOs, to unnamed selected banks. The injection was more than 300 billion yuan ($49 billion) and executed over three consecutive days, the central bank said on its microblog after local markets closed on Dec. 20. The banking system’s excess reserves exceed 1.5 trillion yuan, a historically high level for this period of the year, the PBOC added.
Borrowing costs surged this month as the PBOC stopped adding cash in open-market operations, while banks hoarded funds to meet month- and quarter-end regulatory requirements. The monetary authority typically auctions repurchase or reverse-repurchase agreements on Tuesdays and Thursdays to manage the money supply and has refrained from offering the latter since Dec. 3. Reverse repos involve short-term asset purchases that pump funds into the financial system.
Rising costs of living will keep the central bank from loosening cash conditions, Citic’s Wang added. Consumer prices climbed 3.2 percent in October, the most since February, while the inflation rate was 3 percent last month.
The PBOC’s reluctance to use open-market operations reflects its belief that there’s still ample liquidity in the financial system because of robust capital inflows, as well as an expectation that sizable fiscal deposits will ease the cash shortage in coming days, Barclays Plc economists Jian Chang and Jerry Peng wrote in a Dec. 21 note.
China’s net capital inflows amounted to $110 billion in the last three months, according to a Bloomberg estimate, as the yuan appreciated 0.4 percent. The currency has strengthened 0.4 percent this month to 6.0713 per dollar, a performance second only to India’s rupee in Asia.
A “limited” amount of reverse-repo agreements will probably be offered this week, a move that would send a stronger signal to financial markets of policy makers’ determination to prevent interest rates from climbing too high, said Li Ning, a bond analyst in Shanghai at Haitong Securities Co., the country’s second-biggest brokerage.
A seven-day repo rate above 8 percent would make it likely that open-market operations are used to inject funds, according to Kumar Rachapudi, a Singapore-based strategist at Australia & New Zealand Banking Ltd.
The one-year interest-rate swap that exchanges fixed payments for the seven-day repo jumped as much as 33 basis points last week to 5.07 percent, the highest in Bloomberg data going back to 2006. The contract was little changed today at 5.05 percent.
“The central bank has to do more; the SLOs were apparently not enough,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing, who previously worked for the World Bank. “There’s still a shortage of cash and it is a simple and plain fact. Unlike the situation in June when there was liquidity and panic, now there isn’t enough money and communication on Weibo won’t solve the problem.”
China’s largest banks have sufficient cash, negating the need for fund injections via open-market operations this week, according to Min Shuai, a Shanghai-based fixed-income analyst at Guotai Junan. “The PBOC used SLOs to inject funds only into banks that needed them in order to smooth volatility in liquidity,” he said.
The price of money will settle at a relatively high level due to large demand, Caijing reported Dec. 16, citing a Dec. 6 interview with PBOC Governor Zhou Xiaochuan. New local-currency loans were 624.6 billion yuan in November, according to central bank data. Aggregate financing was 1.23 trillion yuan, exceeding all 12 economist estimates in a Bloomberg survey.
“The central bank needs to ascertain inflation is slowing before it loosens its policy,” said Citic’s Wang. “They also want to use tighter monetary conditions to prompt financial institutions to deleverage and pay more attention to liquidity management.”