China Liquidity Tightens as Tax Demands Outweigh Fund Injections

  • Overnight repurchase rate increases the most since June 30
  • PBOC injections insufficient to meet demand, ANZ says

China’s liquidity is tightening again as companies hoard funds for tax payments and step up bond issuance before a possible intensification of a government deleveraging drive.

The overnight repurchase rate, a gauge of interbank funding availability, climbed 12 basis points, the most since June 30, to 2.7587% as of 5:45 p.m. in Shanghai. The increase came even after the People’s Bank of China added a total of 310 billion yuan ($46 billion) of cash into the financial system via open-market operations this week, with Tuesday’s injections being the largest in a month.

The net additions aren’t sufficient to fulfill demand for cash, with maturities of previous injections and corporate tax payments locking up more than 600 billion yuan this week, according to David Qu, a market economist in Shanghai at Australia & New Zealand Banking Group Ltd. Chinese companies have announced plans for a combined 479 billion yuan of debt issuance this month, exceeding the 460 billion yuan sold for the whole of June.

Concern that the government will step up its campaign to cut debt in the financial sector is also weighing on sentiment. Authorities will actively prevent and resolve systemic financial risks, and increase efforts to reduce leverage in the economy, the official Xinhua News Agency reported, citing President Xi Jinping at a high-profile conference over the weekend.

“The market’s previous expectations for liquidity conditions were too optimistic,” Qin Han, a bond analyst at Guotai Junan Securities Co., wrote in a note Tuesday. Investors should be more vigilant, as more deleveraging measures could arrive as soon as the third quarter, he wrote. “There are more and more risks in the bond market, and investors should be cautious as policy makers may deal a second round of ‘regulatory blows.’”

— With assistance by Tian Chen

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