China Money Market Pain Eases as Central Bank Measures Take Root

  • Seven-day repurchase rate declines the most in two years
  • Liquidity situation may tighten later this month: analyst

Steven Barrow: PBOC Can Stem the Yuan's Decline

China’s benchmark money-market rate declined the most in two years after the central bank took measures to ease a liquidity crunch.

The benchmark seven-day repurchase rate fell 37 basis points to 2.30 percent, according to weighted average prices from the National Interbank Funding Center. The average interbank repo rate surged to a 20-month high in December on a combination of year-end cash demand and mounting concern over counterparty risks.

The People’s Bank of China used its Medium-term Lending Facility to provide record loans to commercial lenders last month, after helping to steer funding costs higher by injecting longer-term funds into the financial system to contain asset bubbles and financial risks. Prospects for stronger cash demand ahead of Lunar New Year holidays that begin Jan. 27 could lead to tighter liquidity.

Interbank liquidity is now looser following the MLF injections, said Hong Ben, an analyst at Yinzhou Bank. “Later this month, when the Chinese New Year holidays are approaching, the market may tighten again.”

China’s 10-year government bond yield rose for a third straight month in December, its longest rising streak since 2013, after a brokerage reportedly declined to honor its debt trading agreements. It later said it had reached agreement on the deals. The onshore yuan fell 6.5 percent against the dollar last year, its worst annual performance in more than two decades. The PBOC’s yuan positions -- a gauge of capital flows -- dropped the most in 10 months in November.

The central bank injected a net 721.5 billion yuan ($103.7 billion) last month via MLF. It pulled a combined 295 billion yuan in open-market operations in the two trading days this week, after withdrawing a net 245 billion yuan last week, data compiled by Bloomberg show. 

The yield on 10-year government bonds due November 2026 rose for a second day, adding six basis points to 3.18 percent, according to National Interbank Funding Center prices.

— With assistance by Helen Sun

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