China’s benchmark seven-day repo rate posted an unusually high 6.5000 per cent quote on Thursday morning after the central bank abstained from injecting funds into a market traders say is growing increasingly tight.
The quote was the second after the opening quote and was immediately followed by several far larger transactions at much lower rates, which brought the volume-weighted average price (VWAP) back down to 4.0492 per cent, a slight increase from Wednesday’s close.
Traders generally look at the VWAP for an indication of wider money market conditions.
The People’s Bank of China (PBOC) has refrained from engaging in open market operations since June 20, neither draining nor injecting funds, which traders say has left some smaller overextended banks short on ready cash.
A trader at a foreign bank in Shanghai said that the wild quote was likely from a smaller bank desperate for money.
“I haven’t heard which bank it was but I don’t think it could have been a big one,” he said.
Markets were startled last Friday when the overnight repo rate opened with a quote near 6 per cent, which also went unsupported by further transactions.
Traders said the quote was the result of a transaction by two rural cooperative banks, which were subsequently disciplined by the interbank market exchange for distorting the market.
Dealers and stock investors are concerned that the central bank will allow another credit crunch to occur at the end of the month, similar to the squeeze that happened in late June that saw short-term money rates as high as 30 per cent, but it appears the central bank has encouraged the big banks to keep a cap on average rates through large transactions this time around.
Banks and corporates are currently hoarding cash for dividend payments and to balance books by the end of the month, putting upward pressure on rates, but so far there has been no sign of extraordinary tightening, with the most commonly traded tenors remaining around 4 per cent.