China Money Rate Drops on Easing Signals, Central Bank Injection

China’s benchmark money-market rate fell the most in three weeks after Premier Li Keqiang signaled more policy easing to counter an economic slowdown and the central bank stepped up fund injections.

Premier Li said the downturn pressure in China’s economy is “relatively large” and the nation will fine-tune policies when needed to solve problems such as financing difficulties for small companies, according to a statement on the government’s website on May 23. The People’s Bank of China added a net 120 billion yuan ($19.2 billion) to the financial system last week, the most in four months, to boost cash supplies as lenders park corporate tax collections at the central bank.

The seven-day repurchase rate, a gauge of interbank funding availability, slid 18 basis points, or 0.18 percentage point, to 3.20 percent as of 4:11 p.m. in Shanghai, a weighted average compiled by the National Interbank Funding Center shows. That was the biggest drop since May 5. The rate touched 3.11 percent earlier, the lowest level since May 19.

“Last week’s injection in open-market operations alleviated traders’ concern over month-end cash shortages,” said Chen Peng, an analyst at Fortune Securities Co. in Shenzhen. “Besides, Premier Li’s comments, which have been consistent with previous comments that the central government will take actions to stabilize growth, assured the market that there won’t be a rate spike in June.”

The cost of one-year interest-rate swaps, the fixed payment needed to receive the floating seven-day repo rate, declined five basis points to 3.62 percent, according to data compiled by Bloomberg.

Policy Outlook

Potential policy easing in China may include an incremental loosening of credit quotas, a relaxation of the loan-to-deposit ratio, more re-lending and a cut in the reserve requirement or interest rates, economists led by Hong Kong-based Yu Song at Goldman Sachs Group Inc. wrote in a research note today.

The central bank will auction 40 billion yuan of nine-month treasury deposits on behalf of the Ministry of Finance on May 29, according to a statement on the ministry’s website today.

“With only 50 billion yuan of repos maturing this week, today’s announcement is a timely message from the PBOC, telling the market liquidity shouldn’t be a concern,” said Chen Long, an analyst at Bank of Dongguan Co. in Guangdong province.

The PBOC gauged demand for 14- and 28-day repurchase agreements, seven- and 14-day reverse repos, and 91-day bills for this week as usual, according to a trader at a primary dealer required to bid at the auctions.

The yield on China’s government bonds due March 2024 was steady at 4.20 percent, according to prices from the National Interbank Funding Center.

— With assistance by Helen Sun

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