China Money Rate Jumps Most in 13 Months on Outflows, Hoarding

  • Increase comes even after PBOC adds 410 billion yuan via MLF
  • Currency-related withdrawals are tightening liquidity: Guangfa

China’s 14-day money-market rate jumped the most in 13 months as capital outflows and cash hoarding in the runup to the Lunar New Year holidays outweighed central bank injections.

The nation’s foreign-exchange reserves dropped by a record last month, as the People’s Bank of China sold an unprecedented amount of foreign currency in an effort to stem a slide in the yuan. The monetary authority provided 410 billion yuan ($62 billion) to commercial lenders via its Medium-term Lending Facility on Tuesday and lowered the interest rates on the loans. It plans to inject more than 600 billion yuan into the financial system to meet demand before the week-long Chinese New Year holidays that start Feb. 8.

“The market is still tight, despite the injections,” said Yan Yan, a Shanghai-based analyst at China Guangfa Bank Co. “All the seasonal factors, plus the capital outflows and currency market-related liquidity drain, are tightening interbank liquidity.”

The 14-day repurchase rate, a gauge of funding availability in the financial system, jumped 48 basis points to 3.30 percent as of 4:30 p.m. in Shanghai, following an 18-point increase on Tuesday, according to a weighted average price from the National Interbank Funding Center. The overnight repo rate rose 13 basis points to 2.13 percent after surging to 2.18 percent earlier, the highest since April 2015.

Liquidity Injections

Tuesday’s MLF injections to 22 financial institutions came after 100 billion yuan of such three-month loans granted on Jan. 15, and compare with 250 billion yuan of the credit that matured earlier this month. The loans will play a similar role to a reserve-requirement ratio cut, Ma Jun, chief economist at the PBOC’s research bureau, said in an interview with China Central Television.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, increased for a fifth day, by one basis point to 2.29 percent, data compiled by Bloomberg show.

The central bank pumped a net 230 billion yuan into the financial system in the last two weeks via open-market operations, and offered 28-day reverse-repo contracts Tuesday to cover the holiday period. It also provided 55 billion yuan three-day loans via Short-term Liquidity Operations on Monday, and auctioned 80 billion yuan of treasury deposits on behalf of the Ministry of Finance.

“The impact of these liquidity tools on the cost of funding and on confidence levels are not as strong as the reserve-requirement ratio,” said Julia Wang, a Hong Kong-based economist at HSBC Holdings Plc. “We still think the PBOC needs to do more across-the-board easing.”

More Easing

The central bank will lower the reserve-requirement ratio to 16.5 percent by the end of the first quarter from 17.5 percent, and cut the benchmark one-year lending rate to 4.1 percent from 4.35 percent, according to a Bloomberg survey conducted last month.

The yield on sovereign bonds due October 2025 rose for a third day, increasing one basis point to 2.81 percent, according to National Interbank Funding Center prices.

“The rising overnight repo rate will force highly-leveraged investors to unwind their positions, leading to a further decline in bonds,” said China Guangfa’s Yan.

— With assistance by Helen Sun

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