China liquidity stress signs build as fund cost jumps at auction

[SHANGHAI] Chinese lenders paid the highest interest rate in more than two years to borrow short-term government funds on Thursday, adding to recent signs of a mismatch between the demand and supply of cash.

The People's Bank of China auctioned 80 billion yuan (S$16.3 billion) of three-month treasury deposits on behalf of the Ministry of Finance at 4.51 per cent, according to a statement on its website. That's the most expensive since December 2014.

The nation's money markets - already pressured by an official deleveraging drive - will be challenged again next month by quarter-end demand and a record 2.3 trillion yuan in maturities of negotiable certificates of deposit. Liquidity has been cramped this week, with the PBOC draining funds on all four trading days. The lack of injections in open-market operations and the auction of state funds suggest that policy makers are trying to push the use of more expensive, longer-term financing.

"The PBOC wants to drive the borrowing costs higher by providing longer-term funds," said Li Qilin, chief macroeconomic researcher at Lianxun Securities Co. "This helps achieve the goal of curbing leverage in the financial system." Thursday's auction was the second in less than a week, with the first on Aug 18 - also of three-month treasury deposits - fetching 4.46 per cent. The central bank has pulled 200 billion yuan through open-market operations so far this week.

In the money markets Thursday, the one-week weighted average fell three basis points to 2.88 per cent as of 11.46 am in Shanghai. The overnight rate retreated three basis points to 2.84 per cent. Investors received a temporary shock on Wednesday when borrowing costs showed an early surge. Some opening prices were wrong because of calculation problems, according to four traders who cited an announcement from the National Interbank Funding Center. The rates were later corrected, they said.

The cost of one-year interest-rate swaps, the fixed payment to receive the seven-day repurchase rate, rose for a fourth day, adding one basis point to 3.50 per cent.

There will be an estimated 600 billion yuan of fiscal funds released in September that almost matches the scale of a reserve-requirement ratio cut, China Merchants Securities Co analysts led by Xu Hanfei wrote in a note Thursday. This will greatly improve interbank liquidity, they added.

BLOOMBERG