China Economy

Bond sale fails to reach target on cash crunch

Finance ministry nets only 9.5 billion yuan at auction as funding squeeze keeps buyers away

PUBLISHED : Saturday, 15 June, 2013, 12:00am
UPDATED : Saturday, 15 June, 2013, 3:29am

The finance ministry failed to sell all the debt it offered at auction for the first time in 23 months because of a cash squeeze that threatens to exacerbate a slowdown in the growth of the mainland economy.

The ministry sold 9.53 billion yuan (HK$12 billion) of 273-day bills, well below the 15 billion yuan target, according to two traders who took part in the auctions.

Agricultural Development Bank of China raised 11.51 billion yuan in a sale of six-month bills last week, also less than its 20 billion yuan goal.

The seven-day repurchase rate, which measures interbank funding availability, has more than doubled in the past month as banks hoard money to meet quarter-end capital requirements and capital inflows ease.

"The cash crunch is curbing demand for bonds," said Chen Ying, a fixed-income analyst at Sealand Securities. "The crunch may persist if the central bank doesn't come out to inject more capital into the financial system. If it lasts longer, it may affect issuance of both government and corporate bonds."

The average yield at yesterday's bill sale was 3.76 per cent, said the traders. That compares with 3.14 per cent on Thursday for similar-maturity existing securities, according to Chinabond, the country's biggest debt-clearing house.

The ministry's last failed auction was a sale of 182-day bills in July 2011.

The cash shortage comes at a time when the mainland's economic outlook is deteriorating. Expansion has held below 8 per cent for the past four quarters, the first time that has happened in at least 20 years, and Morgan Stanley, UBS and Royal Bank of Scotland are among at least eight global banks and brokerages that this week cut growth estimates for this year. The World Bank slashed its forecast to 7.7 per cent from 8.4 per cent in a report released on Wednesday.

The People's Bank of China added a net 92 billion yuan into the financial system this week, down from 160 billion yuan in the five days to June 7. The central bank refrained from draining funds from the financial system on Thursday for the first time in three months as money markets reopened after a three-day holiday. The last time it used reverse-repurchase agreements to inject funds was on February 7.

"If the central bank doesn't conduct reverse-repurchase agreements or short-term liquidity operations to inject capital, cash supply will stay tight for the rest of the month," said Cheng Qingsheng, a bond analyst at Evergrowing Bank.

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, climbed 0.12 percentage point, to 3.77 per cent in mid-afternoon trade in Shanghai. It touched 3.78 per cent, the highest level since October 2011.