PBOC Resumes Reverse-Repo Cash Injections After 13-Day Pause

  • Operations result in a net addition of 70 billion yuan
  • Benchmark money rate drops as quarter-end demand eases

China’s central bank restarted the use of an instrument that adds cash to the financial system, adding liquidity before more than $45 billion of funds come due.

The People’s Bank of China auctioned 110 billion yuan ($16 billion) of reverse-repurchase agreements on Thursday. The offering -- the first since March 23 -- comes before 314.5 billion yuan of such contracts and Medium-term Lending Facility loans mature by the end of next week, data compiled by Bloomberg show.

The monetary authority had refrained from adding cash to the system for 13 days in a row, the longest stretch since it started daily open-market operations at the beginning of last year, draining a net 490 billion yuan. Skipping reverse-repo auctions is part of a campaign to reduce leverage in the financial system.

“Given there is MLF coming due, the resumption of sales could mean the PBOC won’t roll over all the contracts,” said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking Group Ltd. “The PBOC may also want to give price guidance by restarting the operations.”

The central bank auctioned 70 billion yuan of seven-day reverse repos on Thursday, 20 billion yuan of 14-day contracts and 20 billion yuan of 28-day agreements, according to a statement on the PBOC website. That resulted in a net injection of 70 billion yuan, after accounting for 40 billion yuan of maturing contracts.

China’s benchmark seven-day repurchase rate surged to an almost two-year high on March 31, before declining 58 basis points this month through Wednesday as quarter-end funds began trickling back into the financial system. The rate rose one basis point to 2.60 percent on Thursday, according to weighted average prices.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was unchanged at 3.58 percent. The yield on 10-year government bonds was little changed at 3.33 percent, according to National Interbank Funding Center prices.

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Thursday’s injection came as 451.5 billion yuan of Medium-term Lending Facility mature this week and next, and followed a slew of regulatory measures to enhance commercial banks’ risk controls.

The China Banking Regulatory Commission issued guidelines this month asking lenders to prevent credit and liquidity risks, and improve the management of bond investments and interbank businesses. In another notice, it asked banks to check if outstanding interbank debt are more than a third of total liabilities and if such loans exceed more than half of Tier 1 capital, Caixin reported on Wednesday.

“The current liquidity is relatively loose, but if the central bank lets the MLFs mature without doing anything, the impact would still be too big for the market,” said Li Liuyang, a Shanghai-based market analyst at Bank of Tokyo-Mitsubishi UFJ (China). “Using open-market operations will help smooth out the impact, pulling the cash gradually.”

The central bank Thursday said it also granted 83.9 billion yuan of loans via its Pledged Supplementary Lending facility. This program is used to fund the nation’s three policy banks for investment in areas including shantytown development.

— With assistance by Helen Sun, Jing Zhao, Ling Zeng, and Xize Kang

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