PBOC Doesn't Offer Reverse Repos for First Time in Six Months

  • Interbank liquidity not tightened much: China Merchants Bank
  • Benchmark money-market rate extends decline for the year

The People’s Bank of China refrained from offering reverse-repurchase agreements in open-market operations for the first time in six months, halting cash injections that helped drive borrowing costs lower amid the slowest economic growth in two decades.

The decision to withhold the short-term lending tool comes after their use was scaled back in Tuesday’s auction window, when 10 billion yuan ($1.5 billion) of seven-day agreements were made available. That compares with a total of 70 billion yuan at the Dec. 22 and Dec. 24 auctions and resulted in a net 60 billion yuan being drained from the banking system this week. Lenders’ demand for funds typically rises in the run-up to year-end liquidity checks by regulators.

The benchmark seven-day repurchase rate fell 11 basis points to 2.32 percent in Shanghai, extending this year’s decline to a record 264 basis points, according to a weighted average from the National Interbank Funding Center.

“Compared with previous years, interbank liquidity isn’t tightening much this time,” said Wan Zhao, a Shanghai-based analyst at China Merchants Bank Co. “We also don’t rule out the possibility of a reserve-requirement-ratio cut. If the central bank is preparing that, then reverse repos aren’t necessary.”

The PBOC drained a net 20 billion yuan via open-market operations this month, and let 80 billion yuan of treasury deposits mature, which also pulled funds from the financial system. It wasn’t all take, however, with the central bank having added 100 billion yuan using six-month loans under its Medium-term Lending Facility on Dec. 18.

Swaps, Bonds

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose one basis point to 2.33 percent, data compiled by Bloomberg show. It’s dropped 110 basis points this year. The yield on sovereign bonds due October 2025 climbed one basis point to 2.86 percent, according to National Interbank Funding Center prices. The benchmark 10-year yield sank 80 basis points in 2015 to 2.83 percent on Wednesday, ChinaBond data show.

If there’s ample liquidity, it’s likely the central bank will continue to refrain from conducting reverse repos after the new year holiday, according to Xu Yuehong, a Shanghai-based senior analyst at Bank of Communications Co.

A central bank economist this week damped speculation reserve requirements will be eased, saying that any adjustments should avoid causing too much volatility to short-term rates. In deciding on changes, maintaining stable money rates should be considered a priority as inappropriate timing and scale can lead to unwanted policy transmissions into the real economy, Ma Jun, chief economist of the People’s Bank of China’s research bureau, wrote in a newspaper commentary on Wednesday.

“I don’t think it’s necessary to read too much into today’s move,” said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. “This is the last day of the year, and a lot of people will take a half day off. Even if the PBOC offers 20 billion or 30 billion yuan of reverse repos, it doesn’t really make too much difference to the market.”

— With assistance by Helen Sun

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