PBOC Conducts First Reverse Repos Since February; Swaps Decline

China’s central bank conducted reverse-repurchase operations for the first time in five months, helping alleviate a cash squeeze that drove the benchmark interbank lending rate to a four-week high.

The People’s Bank of China added 17 billion yuan ($2.8 billion) to the financial system today at a yield of 4.4 percent using seven-day reverse repos. That compares with 3.35 percent when the contracts were last issued on Jan. 31 and 3.45 percent at a Feb. 7 auction of 14-day agreements, according to central bank data compiled by Bloomberg. Interest-rate swaps and money-market rates declined, while China’s stocks rose.

“The PBOC is not prepared to ease liquidity aggressively; that’s why they offered these reverse repos at a higher rate than before,” said Albert Leung, a strategist at Bank of America Merrill Lynch in Hong Kong. “At the same time they are also prepared to step in when the liquidity is too tight, so most likely the situation will be that liquidity will be tighter in the second half of the year than the first half.”

The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, dropped eight basis points to 4.01 percent as of 4:32 p.m. in Shanghai, according to data compiled by Bloomberg. That’s the biggest decline since July 3.

The seven-day repo rate, a gauge of the availability of cash in the banking system, fell 12 basis points, or 0.12 percentage point, to 4.998 percent, according to a weighted average compiled by the National Interbank Funding Center. It exceeded 5 percent yesterday for the first time in four weeks and reached a record 12.45 percent on June 20.

Liquidity is often tight at month-end as banks hoard money to meet regulatory requirements, Bank of America’s Leung said.

PBOC Shift

The resumption of reverse repos reflects a “shift” in the PBOC’s stance to prevent a repeat of last month’s cash crunch, according to Wee-Khoon Chong, a strategist at Societe Generale SA in Hong Kong. “The levels could also serve as a signal that the era of ultra-loose and easy money is over,” he wrote in a note today.

China’s stocks rose, erasing the benchmark index’s losses this month, as the resumption of reverse repos boosted financial companies.

The Shanghai Composite Index rose for the first time in five days, adding 0.7 percent to 1,990.06. The gauge has risen 0.6 percent this month after plunging 14 percent in June. Ping An Bank Co. gained 2.9 percent, Citic Securities Co. advanced 2 percent and Bank of China Ltd. climbed 1.5 percent.

A total of 85 billion yuan of central bank bills will mature this week, compared with zero last week, data compiled by Bloomberg show.

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