PBOC Pares Open-Market Injections as Money-Market Rates Decline

  • Weekly net additions are biggest since February 2015
  • Reverse-repo offerings likely to remain large: Tebon

The People’s Bank of China cut cash injections via open-market operations by almost half on Thursday after money-market rates fell.

The central bank offered 70 billion yuan ($10.6 billion) of seven-day reverse-repurchase agreements, compared with 130 billion yuan on Tuesday that was the most since September. That resulted in 190 billion yuan of weekly additions when maturing contracts are taken into account, the biggest in almost a year.

Trading of shares was halted on Monday after a 7 percent selloff in a benchmark index and interbank liquidity tightened, prompting the big PBOC injection on Tuesday in the first open-market operations of 2016. Stock trading was stopped again on Thursday. The central bank has become more tolerant of a weakening currency, cutting the daily reference rate for an eighth day on Thursday, even as Societe Generale SA estimated capital outflows climbed to a record $221 billion in the third quarter.

“In retrospect, Tuesday’s injection was largely targeting Monday’s interbank liquidity tightening and to comfort the market after the equities slump,” said Zhang Guoyu, a Shanghai-based bond analyst at Tebon Securities Co. “Having said that, the yuan’s depreciation pressure and capital outflows are likely to keep the reverse-repo offerings big, before a reserve-requirement ratio cut.”

The overnight repurchase rate, a gauge of interbank funding availability, fell one basis point to 1.96 percent as of 4:34 p.m. in Shanghai, according to a weighted average from the National Interbank Funding Center, after dropping as much as five basis points earlier. The rate has declined 16 basis points this year from 2.12 percent on Dec. 31, the highest since April.

Bonds Rally

The PBOC drained cash in December via open-market operations and its Medium-Term Lending Facility. It also let 80 billion yuan of treasury deposits mature, pulling cash from the financial system, even as demand for funds increased at the year-end. The monetary authority cut the reserve-requirement ratio for major lenders by a total of 250 basis points in 2015 to 17.5 percent, and is forecast to lower it to 15 percent by the end of this year, according to a Bloomberg survey last month.

“A reserve-ratio cut is likely in January due to the yuan’s depreciation pressure and rising demand for funds before the Chinese New Year holidays in February,” said Shen Bifan, a Shenzhen-based analyst at First Capital Securities Co.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell one basis point to 2.32 percent, data compiled by Bloomberg show. The yield on government bonds due October 2025 declined five basis points to 2.88 percent, according to National Interbank Funding Center prices. That was the biggest drop in more than two weeks.

— With assistance by Helen Sun

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