PBOC Scales Back Cash Injections Before Banks' Liquidity Checks

  • Benchmark money-market rate climbs to highest in three months
  • Central bank may use other tools to add funds, says analyst

The People’s Bank of China scaled back the use of a short-term lending tool in its open-market operations, draining cash from the financial system as banks prepare to meet year-end liquidity checks by regulators.

The monetary authority auctioned 10 billion yuan ($1.5 billion) of seven-day reverse-repurchase agreements at an interest rate of 2.25 percent, less than the 30 billion offered a week ago. Banks’ demand for funds typically rises in the run-up to deadlines for them to meet regulatory requirements.

“It’s surprising to see a net withdrawal today in open-market operations,” said Li Liuyang, chief financial market analyst at Bank of Tokyo-Mitsubishi UFJ (China) Ltd. in Shanghai. “It either means there is too much liquidity in the interbank market, so there’s not much demand for reverse repos, or the central bank is preparing to use other tools, including reserve-requirement-ratio cuts, to meet demand for funds.”

The seven-day repo rate rose three basis points to 2.43 percent as of 4:30 p.m. in Shanghai, the highest since Sept. 29, according to a weighted average from the National Interbank Funding Center. The rate opened at 2.25 percent, as it has almost every day since the PBOC last cut its benchmark interest rates on Oct. 26.

The PBOC lowered its benchmark one-year lending and deposit rates six times since November 2014 to help counter an economic slowdown that’s brought about the slowest growth in more than two decades. The seven-day repo rate has dropped 253 basis points this year, set for the biggest annual decline on record.

The yield on bonds due October 2025 fell two basis points to 2.82 percent, after rising by the same amount on Monday, according to National Interbank Funding Center prices. The benchmark 10-year yield has slid 82 basis points this year through Monday, following a drop of 93 basis points in 2014, ChinaBond data show.

The bull run in China’s bond market is likely to end in the first half of 2016 as the economy stabilizes, according to the findings of a Bloomberg survey of 22 traders and analysts last week.

— With assistance by Helen Sun

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