PBOC Boosts Injections as Money Rates Climb to Two-Week High

  • Uses 28-day contracts to cover pre-Lunar New Year demand
  • Auctions 9-month treasury deposits amid efforts to boost cash

China stepped up cash injections in its open-market operations, striving to keep borrowing costs low as slowing economic growth spurs capital outflows.

The People’s Bank of China auctioned 80 billion yuan ($12 billion) of seven-day reverse-repurchase agreements, matching the amount offered a week ago, and another 75 billion yuan of 28-day contracts that will mature after the week-long Chinese New Year holidays starting Feb. 8. Gross domestic product rose 6.8 percent in the fourth quarter of 2015, missing analysts’ estimates, a report showed Tuesday. The central bank sold a record amount of foreign currency last month amid efforts to stem the yuan’s slide.

This month’s increase in open-market injections comes after the PBOC drained funds in December. The monetary authority pumped in a net 230 billion yuan in the last two weeks as money rates climbed, boosted by increased cash demand to meet quarterly tax payments and the planned imposition of reserve requirements on foreign banks’ onshore deposits of yuan.

“The use of the 28-day contracts is obviously to cover pre-holiday demand,” said Wan Zhao, a Shanghai-based analyst at China Merchants Bank Co. “The injections may not be enough to cover the funding demand as multiple factors, from tax payments to the new reserve-requirement rule, are affecting the outlook for interbank liquidity.”

Money Rates

The overnight repurchase rate, a gauge of interbank funding availability, rose six basis points to 1.99 percent as of 4:36 p.m. in Shanghai, prices from the National Interbank Funding Center show. That’s the biggest gain this year. It climbed to 2 percent earlier, the highest since Jan. 5. The benchmark seven-day repo rate increased for a fifth day, rising nine basis points to a three-week high of 2.42 percent.

Commercial lenders need to park companies’ tax funds at the PBOC in the month after the quarter-end and this often drives short-term rates higher. The impact on banking-system liquidity is seen intensifying as demand for cash increases on account of the Chinese New Year holidays. The PBOC also auctioned 80 billion yuan of nine-month treasury deposits on behalf of the Ministry of Finance Tuesday, a move that should help boost cash supply.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, increased one basis point to 2.29 percent, data compiled by Bloomberg show. Sovereign bonds declined, with the yield on notes due October 2025 rising two basis points to 2.80 percent, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

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