PBOC Seen Using Reverse Repos Purely to Guide Short-Term Rates

  • Central bank offers 10 billion yuan for fourth time in a row
  • Open-market operations are ideal benchmark for rates: Haitong

The People’s Bank of China used its open-market operations to inject a minimal amount of cash for the fourth auction in a row, fueling speculation the contracts are being offered solely to guide interest rates in a financial system that’s flush with funds.

The central bank offered 10 billion yuan ($1.6 billion) of seven-day reverse-repurchase agreements at 2.25 percent on Thursday, keeping the amount at the lowest level since June. The terms have been the same at each of the twice-weekly auctions since the authority cut its benchmark one-year interest rates on Oct. 24. That reduction in borrowing costs was combined with a relaxation of lenders’ reserve requirements, a move Bloomberg analysts estimate released around 650 billion yuan into the banking system, and the scrapping of a ceiling on deposit rates.

“There’s ample liquidity in the market following the reserve-ratio cut, so the central bank seems to be using open-market operations to tell the market what it considers are appropriate short-term borrowing costs,” said Wan Zhao, a Shanghai-based analyst at China Merchants Bank Co. “The PBOC may further lower the rate offered, if it wants to boost credit growth.”

Premier Li Keqiang stressed the need for more reforms to liberalize interest rates in a State Council meeting on Wednesday, saying benchmark deposit and lending rates will continue to serve as a reference as China shifts to a market-based system of determining borrowing costs. The PBOC said in 2013, when it scrapped a floor on lending rates, that the removal of the deposit-rate ceiling was the “riskiest” part of the process to free up funding costs.

The seven-day repo rate, a gauge of interbank funding availability, opened at 2.25 percent for an eighth consecutive day. It closed at 2.29 percent in Shanghai, down two basis points from Wednesday, a weighted average from the National Interbank Funding Center shows.

New Benchmark

The regularity of the PBOC’s open-market operations and the direct impact they have on repo rates makes them the ideal candidate to become the new effective benchmark interest rate, according to a research note released Tuesday by Haitong Securities Co. analysts led by Jiang Chao.

The seven-day repo rate will fall toward the one-year deposit rate of 1.5 percent as the central bank shifts to targeting short-term money rates, Sean Yokota, the Singapore-based head of Asia strategy at Skandinaviska Enskilda Banken AB, wrote in a report Tuesday.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repo rate, fell one basis point to 2.36 percent as of 4:32 p.m. in Shanghai. The yield on the sovereign bonds due October 2025 declined one basis point to 3.13 percent, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

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