China Money Rates Fall as PBOC’s Open-Market Operations Add Cash

China’s money-market rates fell as the central bank drained less cash from the financial system than it added this week.

The People’s Bank of China sold a total 184 billion yuan ($29.5 billion) of 28-day repurchase agreements on May 13 and today, while 228 billion yuan of repo contracts and three-year bills matured. The agreements have been sold every week since the start of March and priced at 4 percent. Governor Zhou Xiaochuan said the monetary authority may adopt a new policy rate that can be used to influence borrowing costs, according to the transcript of a May 10 speech that was posted on the Economic Observer newspaper’s website.

“PBOC does not have a hawkish stance at all,” said Frances Cheung, Hong Kong-based head of Asian rates strategy at Credit Agricole CIB. “Rates are already low. If the rates on the PBOC’s repo operations are formally formulated into policy rates, the level of rates done on their repos will have an even bigger impact on market levels.”

The seven-day repo rate, a gauge of interbank funding availability, declined eight basis points to 3.13 percent in Shanghai, according to a weighted average by the National Interbank Funding Center. That was the biggest drop since May 5. The overnight repo rate fell two basis points, or 0.02 percentage point, to 2.35 percent.

The yield on government bonds due March 2024 rose three basis points to 4.23 percent. The one-year interest-rate swap, which exchanges fixed payments for the floating seven-day repo rate, increased one basis point to 3.75 percent, data compiled by Bloomberg show.

Rates Band

The central bank will consider limiting moves in short-term interest rates as controls on borrowing costs are eased, according to the Zhou transcript. This would involve setting a range around its chosen policy rate that could be maintained by the central bank soaking up funds when borrowing costs hit the lower end and injecting cash when the ceiling is reached, the transcript said.

The PBOC helped address a cash squeeze in January before the Lunar New Year holiday by providing funds to smaller lenders in some regions on a trial basis when money-market rates hit certain thresholds. The Standing Lending Facility was used to supply money when the seven-day repo rate exceeded 7 percent and the overnight rate breached 5 percent.

Prior to the move, a seven-day repo transaction was recorded at 10 percent on Jan. 20 and an overnight transaction fetched 9 percent. Those were the highest levels of the year.

(An earlier version of this story was corrected because it contained the wrong timeframe for when the Zhou transcript appeared on the Economic Observer’s website)

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