China’s Repo Rate Jumps Most Since June on Rate Liberalization

China’s benchmark money-market rate jumped the most in six months on bets the central bank will speed up the process of relaxing controls on borrowing costs.

The seven-day repo rate, a gauge of funding availability in the banking system, rose 153 basis points to 6.3 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. That was biggest daily increase since June 20. The rate has advanced 199 basis points, or 1.99 percentage points, this week.

China has allowed lenders to sell negotiable certificates of deposits that reference interbank rates in Shanghai as policy makers loosen control over interest rates, which may lead to higher funding costs, Standard Chartered Plc said in a Dec. 12 report. The price of money will settle at a relatively high level following rate liberalization because of strong demand, Caijing magazine reported this week, citing a Dec. 6 interview with People’s Bank of China Governor Zhou Xiaochuan.

“Now is the time for China to wrap up the market-oriented reform of interest rates,” Tim Condon, Singapore-based head of Asian research at ING Groep NV, wrote in a research note today. “We think the PBOC is preparing the ground by pushing up money-market rates.”

Liquidity Operations

The increase in money-market rates came as data showed new-home prices rose in November from a year earlier in 69 out of 70 cities tracked by China’s statistics bureau, as property measures by local governments failed to deter buyers.

The People’s Bank of China’s money-market operations drained a net 84 billion yuan ($13.8 billion) from the financial system in the two weeks through Dec. 12, after adding 76 billion yuan in the previous two weeks, official data show.

The monetary authority gauged demand for sales of 91-day bills tomorrow, as well as 28-day repurchase contracts and 14-day reverse repos, according to a trader at a primary dealer required to bid at the auctions.

There is speculation the PBOC has stopped or reduced its short-term liquidity operations, said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This would be in line with our view that the central bank is trying to tighten monetary conditions.”

The cost of the benchmark one-year swaps, the fixed payment needed to receive the floating seven-day repurchase rate, rose five basis points to 4.9 percent, data compiled by Bloomberg show. They touched 4.91 percent earlier, the highest level since June 20, and have increased 38 basis points this month.

The yield on government bonds due August 2023 climbed three basis points to 4.63 percent, according to data from the Interbank Funding Center.

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