China Money Rates Tumble for Second Day on Targeted PBOC Easing

China’s benchmark money-market rates tumbled for a second day, extending a retreat from record highs, on signs targeted injections of funds are being used to ease a cash crunch that threatens to worsen an economic slowdown.

Interbank loans were recorded in the final hour of trading on both June 20 and 21 at below-market rates, according to data compiled by Bloomberg. The People’s Bank of China said the nation should “appropriately fine-tune” its policies, according to a statement yesterday that summarized the monetary policy committee’s second-quarter meeting in Beijing. The monetary authority gauged demand for sales of repurchase agreements and reverse-repo contracts this morning, according to a trader at a primary dealer required to bid at the auctions.

The overnight repurchase rate dropped 196 basis points, or 1.96 percentage points, to 6.47 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. It plunged 442 basis points on June 21, from a record 12.85 percent, and is still more than double this year’s average of 3.09 percent. The seven-day rate fell 118 basis points today to 7.32 percent, following a decline of 227 basis points on June 21, a separate fixing showed.

“Persistently high short-term rates will further dampen China’s already sluggish real economic activities,” said Liu Li-Gang, Australia & New Zealand Banking Group Ltd.’s chief China economist in Hong Kong. “While the new government appears to be able to tolerate low growth, it will have to honor its growth target of 7.5 percent set this year. Otherwise, it runs the risk of losing its credibility.”

Forecasts Cut

China International Capital Corp. cut its 2013 forecast for expansion in Asia’s biggest economy to 7.4 percent from 7.7 percent, while Goldman Sachs Group Inc. lowered its projection to 7.4 percent from 7.8 percent. Growth held below 8 percent for each of the last four quarters, the first time that has happened in at least 20 years, official data show.

The cash crunch has caused bond sales to fail and is prompting some issuers to scale back or cancel offerings. China Development Bank Corp. scrapped plans to sell 20 billion yuan of debt tomorrow, according to a statement posted to, the Chinese government bond clearing house website. That came after at least 11 domestic companies delayed bond sales totaling some 7 billion yuan last week, according to company statements posted on Chinabond.


It was the first time since September that the PBOC’s monetary policy committee, led by Governor Zhou Xiaochuan, has used the “fine-tune” phrase. China will strive to make its monetary policies more forward-looking, targeted and flexible, the central bank said yesterday, adding that it is paying close attention to developments in global and domestic financial markets as well as changes in international capital flows.

Yuan positions at local financial institutions accumulated from sales of foreign exchange, an indication of capital flows into China, rose 66.86 billion yuan in May, the central bank reported on June 14. That was the smallest gain since November.

“Following the quarterly policy report, I think the PBOC will do more to ease monetary conditions,” said Dariusz Kowalczyk, a Credit Agricole CIB strategest in Hong Kong. “They probably are trying to make a point that the current mismatch creates systemic risks and want to make a point that banks can’t rely on policy makers to always protect them.”

There is a reasonable amount of liquidity in the financial system and banks should control risks from credit expansion, including those associated with maturity mismatch, the central bank said in a June 17 statement posted today on its website.

Targeted Injections

An intra-day gauge of the overnight repo rate was at 6.65 percent as of 4:46 p.m. in Shanghai, after climbing as high as 15 percent earlier. It touched a record 30 percent on June 20. Six transactions for overnight loans between banks were recorded on June 21 after 3:50 p.m. in Shanghai at rates of 5 percent to 6 percent, compared with the average for the whole day of 9.9 percent, according to data compiled by Bloomberg. For seven-day contracts, the last two trades were made at 5.5 percent each, compared with the day’s average of 10.1 percent.

On June 20, there were five overnight transactions recorded after 3:30 p.m. at rates of 4.11 percent to 4.35 percent, while the average for the whole day was 13.94 percent. For seven-day contracts, there were five trades after 3:55 p.m. at rates of 4.72 percent to 4.75 percent, compared with the day’s average of 12.61 percent.

“It shows the PBOC is entering into the markets in order to bring down money-market rates,” Liu said.

The Shanghai interbank offered rate, or Shibor, for one-month yuan loans dropped 234 basis points today to 7.36 percent, the biggest decline since October 2007, according to a fixing from the National Interbank Funding Center. The June 21 rate of 9.70 percent was the highest in data going back to 2006.

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, slid 19 basis points to 4.25 percent, data compiled by Bloomberg show. It reached an all-time high of 5.06 percent on June 20. The yield on 2.62 percent government bonds due April, 2014 increased six basis points to 3.95 percent, according to the National Interbank Fund Center prices.

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