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China money market rate surges even as PBOC injects record funds

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China's benchmark money-market rate jumped the most in two years, with record central bank cash injections being overwhelmed by demand before the Lunar New Year holidays.

[SHANGHAI] China's benchmark money-market rate jumped the most in two years, with record central bank cash injections being overwhelmed by demand before the Lunar New Year holidays.

The People's Bank of China put in a net 410 billion yuan (S$85 billion) through open-market operations on Wednesday, the biggest daily addition since Bloomberg began compiling the data in 2004. That brings the total injections so far this week to 845 billion yuan. The interbank seven-day repurchase rate jumped 35 basis points, the most since December 2014, to 2.76 per cent, according to weighted average prices.

Demand for cash tends to increase before the Lunar New Year holidays, when households withdraw money to pay for gifts and get-togethers. Month-end corporate tax payments are adding to the pressure this time, with the break running from Jan 27 through Feb. 2. The PBOC offered 200 billion yuan of seven-day reverse repos and 260 billion yuan of 28-day contracts, compared with 50 billion yuan of loans maturing on Wednesday.

"The PBOC aims to ensure that the liquidity situation remains adequate, while the 28-day reverse repo is apparently targeted at covering the holidays," said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale SA. "There could also be preparation for any indirect tightening impact from potential outflows." China's central bank has been offering more 28-day reverse repos than one-week loans in the past two weeks, while curbing the injection of cheaper, short-term funds amid efforts to lower leverage in the financial system. It drained a net 595 billion yuan in the first week of January, before switching to a net injection of 100 billion yuan last week as the seasonal funding demand started to emerge.

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Liquidity conditions are under pressure also because loans are due to mature under the Medium-term Lending Facility, according to Long Hongliang, a trader at Bank of Hebei Co. in Beijing. There are 216.5 billion yuan of MLF contracts maturing this week, data compiled by Bloomberg show. The PBOC offered 305.5 billion yuan of loans to lenders using the tool on Jan 13, compared with 105.5 billion yuan due that day.

The overnight repo rate rose 10 basis points to 2.50 per cent, the highest since April 2015, according to weighted average prices. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, climbed two basis points to 3.23 per cent. The yield on 10-year government bonds due November 2026 was little changed at 3.26 per cent, data compiled by Bloomberg show.

The onshore yuan erased a decline of as much 0.3 per cent to trade 0.2 stronger for the day at 6.8373 a dollar in Shanghai. Its one-week swap points soared to a record, with three onshore traders saying that some investors tried to get yuan from the swaps market because of high funding costs in the money market.

Overseas investors increased their holdings of onshore bonds by 2.1 percent on month in December to 852.6 billion yuan, according to data released by the PBOC on Wednesday. This came despite a tumble in the nation's debt, with an index compiled by Bank of America Merrill Lynch declining 1.7 per cent last month, the most in six years.

BLOOMBERG

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