China Money Rate Drops as PBOC Injects Funds Via Reverse Repos

China’s benchmark money-market rate fell as the central bank added funds to the financial system, ensuring cash supply as demand spikes before the Lunar New Year holidays.

The People’s Bank of China conducted 60 billion yuan ($9.6 billion) of reverse-repurchase operations Tuesday for seven and 28 days, keeping rates close to market levels. The monetary authority offered 30 billion yuan of 28-day contracts at 4.8 percent and a similar amount of seven-day reverse repos at 3.85 percent. China’s new year holidays start Feb. 18.

“The central bank wants to ensure pre-holiday cash demand is met,” said Song Qiuhong, an analyst at Shunde Rural Commercial Bank Co. in Guangdong province. “The interest rate for 28-day repos was higher than expected, indicating the central bank may have the concern that significantly lowering the interest rate could accelerate capital outflows.”

The seven-day repurchase rate, a gauge of interbank funding availability, fell one basis point to 3.88 percent as of 4:40 p.m. in Shanghai, according to a weighted average from the National Interbank Funding Center. It has dropped 26 basis points in three days after rising to a two-week high of 4.13 percent on Jan. 22. The one-month repo rate climbed 10 basis points, or 0.1 percentage point, to 5.03 percent.

The PBOC offered 50 billion yuan of seven-day reverse repos to yield 3.85 percent on Jan. 22, the first time it used the short-term tool in a year. It last used the 28-day contracts in January 2013. The seven-day repo rate climbed to a four-week high of 6.59 percent on Jan. 20, 2014, before the Chinese New Year holidays that started Jan 30. The PBOC injected a net 450 billion yuan in the two weeks before those holidays.

Capital Flows

Yuan positions on the PBOC’s balance sheet, a gauge of capital flows, fell 128.9 billion yuan in December from a month earlier, the most since 2003, official data show. The nation’s trade surplus climbed to a record $54.5 billion in November and was $49.6 billion last month, as foreign-exchange reserves fell to $3.84 trillion in December, from an all-time high of $3.99 trillion in June.

“If capital outflows worsen significantly, the PBOC needs to double the effort to inject liquidity, and we will probably see upward pressure on market rates,” said Chen Yang, a Hong Kong-based rate strategist at Bank of America Corp. “In the very short-term, the depreciation pressure on the yuan reduces the chance of the PBOC cutting interest rates meaningfully.”

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose six basis points to 3.27 percent, data compiled by Bloomberg show.

The yield on government bonds due September 2024 rose four basis points to 3.46 percent, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

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