PBOC Refrains From Adding Cash, Says Enough Liquidity Already

  • Timing isn’t right for repo operations: Guosen Securities
  • Around 2.5 trillion yuan of loans come due this month: Citic

Why Money Keeps Flowing Out of China

China’s central bank refrained from offering reverse-repurchase agreements for the third day in a row, which resulted in a net withdrawal of funds from the financial system.

The People’s Bank of China didn’t carry out the open-market operation because it aims to keep liquidity basically stable, and current levels are relatively high, according to a statement posted on its website. The monetary authority gauged demand for seven-, 14- and 28-day reverse repurchase contracts for the Feb. 8-14 period, according to traders at primary dealers who bid at the auctions. A total of 120 billion yuan ($17.5 billion) of contracts mature on Tuesday.

Chinese policy makers have moved to mopping up record cash injected before the Lunar New Year holidays. The PBOC has refrained from conducting open-market operations for the past three trading days, after raising the cost of such funds on Friday when trading resumed after the break. The central bank has since August strengthened its hold on money-market rates and guided financing costs higher to discourage excessive leverage.

“With cash returning to the banking system, the PBOC naturally doesn’t need to provide additional liquidity through reverse repos,” said Shen Bifan, an analyst at fixed-income department at First Capital Securities Co. in Shenzhen. “Moreover, the big picture now is deleverage, so the central bank will continue its efforts to guide short-term rates higher, and we can’t rule out the possibility of further hikes in the reverse repo rates.”

The benchmark 10-year sovereign bond yield was little changed at 3.49 percent on Tuesday, ChinaBond data show. It jumped eight basis points on Monday to the highest level since 2015, amid talk that the PBOC had gauged demand for repurchase agreements that drain funds from the financial system, according to a research note from Guosen Securities Co. on Tuesday.

“It’s not good timing to resume repo operations,” analysts led by Dong Dezhi at Guosen wrote in the note. There is still a shortage of money in the financial system due to falling yuan positions, so reverse repos are needed to supplement supply, according to the analysts.

Read more: A Q&A explainer on how the PBOC’s toolkit works

Some 1.85 trillion yuan of reverse repos and Medium-term Lending Facility loans are set to mature by Feb. 22, and an additional estimated 630 billion yuan offered through the “Temporary Liquidity Facility” will come due, analysts led by Ming Ming at Citic Securities Co. wrote in a note. The impact on liquidity shouldn’t be overlooked, they said.

The benchmark seven-day repo rate, a gauge of interbank funding availability, fell one basis point to 2.43 percent, weighted average prices show.

— With assistance by Helen Sun

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