China money rates tumble as central bank lets cash flow in
China’s inter-bank funding costs fell further on Tuesday as the central bank refrained from draining funds via its regular open market operations, and traders predicted rates would soon return to levels seen before the recent cash crunch that roiled global markets.
The People’s Bank of China (PBOC) allowed 36 billion yuan (HK$45.2 billion) to flow into the banking system through its bills and forward bond repurchase agreements maturing on Tuesday, providing further liquidity to the market that had seen short-term borrowing rates soar to record high levels last month.
“On top of regulators’ conciliatory attitude, the end of the second quarter has removed the biggest seasonal demand for cash in the inter-bank market,” said a dealer at a major Chinese commercial bank in Shanghai.
“Money market rates appear to set to return to normal conditions by around mid-July.”
The benchmark weighted-average seven-day bond repurchase rate slumped 69 basis points (bps) to 4.76 percent, its lowest since June 20, the peak of the liquidity squeeze. It had traded in a 3-4 percent range earlier in the year.
The overnight repo rate tumbled 63 bps to 3.79 percent, while the 14-day rate plunged nearly 100 bps to 5.09 percent.
China’s central bank allowed short-term borrowing costs to spike to close to 30 percent on June 20, sending a blunt but effective message to overstretched banks that it was determined to bring risky lending under control.
Policymakers later issued a flurry of reassurances that there is ample liquidity in the financial system, but markets remain concerned that attempts to curb credit growth would add further strains on the already slowing economy. Banking shares fell in Shanghai on Tuesday.
The PBOC also said on Monday that it had increased the quota on its rediscount window that bank branches can use to support lending to small businesses and the agriculture sector by 12 billion yuan.
Traders said the increased amount was negligible but the move helped support market confidence as it was taken as a gesture that regulators are moving to solve the latest market squeeze.
The market has been hit by heavy demand for funds last month, including those from banks who need more cash to meet regulatory checks and window-dress their books for the quarter-end.
While the central bank has started to offer liquidity to banks, regulators have sent a very clear signal that it would proceed with its plan to clean up the yuan lending market and ensure funds make their way into the real economy, traders said.
In a sign that market liquidity has already improved, a one-year fixed-rate bond by the China Development Bank, a policy bank, was auctioned on Tuesday at a yield of 3.91 percent, much lower than 4.09 percent expected by the market.