PBOC Injects More Cash as Top Leaders Flag Additional Stimulus

  • Central bank conducts 30 billion yuan of reverse repos
  • Ten-year bond yield sinks to lowest level since January 2009

China’s central bank added cash to the financial system via a short-term lending tool after the government signaled the likelihood of more stimulus at the end of an economic planning meeting attended by the nation’s leaders.

The People’s Bank of China auctioned 30 billion yuan ($4.7 billion) of seven-day reverse-repurchase contracts in its open-market operations on Tuesday at a yield of 2.25 percent, up from 10 billion yuan a week earlier. Monetary policy must be more "flexible" and fiscal policy more “forceful” as leaders create “appropriate monetary conditions for structural reforms,” according to statements released at the end of the government’s Central Economic Work Conference. The PBOC was said to have surveyed banks recently on the possibility and potential impact of scrapping its benchmark deposit and lending rates.

"Persistent downward pressure on economic activities and lasting deflationary pressure in the industrial sector have shifted the debate toward a more easing bias, and will likely pressure the central bank to ease monetary policy further," UBS AG economists including Wang Tao wrote in a note on Tuesday. "We expect the bond market to continue to perform well and expand."

Sovereign notes due in October 2025 rallied for a sixth day, pushing their yield down by two basis points to 2.88 percent as of 4:19 p.m. in Shanghai, according to National Interbank Funding Center prices. That’s the lowest level for a benchmark 10-year note since January 2009.

The Central Economic Work Conference has boosted investor appetite for government bonds, contributing to the rally, Guosen Securities Co. analysts including Dong Dezhi wrote in a note on Tuesday. The 10-year yield will fall to 2.5 percent next year as China’s growth slows, they said.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, was steady at 2.31 percent. The seven-day repo rate rose two basis points to 2.34 percent, according to a weighted average from the National Interbank Funding Center. UBS predicts a decline toward 1.8 percent in 2016, and said it expects the central bank to lower benchmark interest rates twice by early 2016.

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