China money rate drops as central bank injects funds through reverse repos

Shanghai

CHINA'S benchmark money-market rate fell on Tuesday as the People's Bank of China (PBOC) added funds to the financial system, ensuring cash supply as demand spikes before the Chinese New Year holidays.

The central bank conducted 60 billion yuan (S$13.1 billion) of reverse repurchase operations for seven and 28 days, keeping rates close to market levels.

The monetary authority offered 30 billion yuan of 28-day contracts at 4.8 per cent and a similar amount in seven-day reverse repos at 3.85 per cent. China's new year holidays start on Feb 18.

"The central bank wants to ensure pre-holiday cash demand is met," said Song Qiuhong, an analyst at Shunde Rural Commercial Bank Co in Guangdong province. "The interest rate for 28-day repos was higher than expected, indicating the central bank may have the concern that significantly lowering the interest rate could accelerate capital outflows."

The seven-day repurchase rate (a gauge of interbank funding availability) fell two basis points to 3.87 per cent at 11:34am in Shanghai, according to a weighted average from the National Interbank Funding Center. It had dropped 26 basis points in the previous three days after rising to a two-week high of 4.13 per cent on Jan 22. The one-month repo rate climbed eight basis points, or 0.08 percentage point, to 5 per cent.

The PBOC offered 50 billion yuan of seven-day reverse repos to yield 3.85 per cent on Jan 22, the first time it used the short-term tool in a year. It last used the 28-day contracts in January 2013. The seven-day repo rate climbed to a four-week high of 6.59 per cent on Jan 20, 2014, before the Chinese New Year holidays that started on Jan 30. The PBOC injected a net 450 billion yuan in the two weeks before those holidays.

Yuan positions on the PBOC's balance sheet (a gauge of capital flows) fell 128.9 billion yuan in December from a month earlier - the most since 2003, official data shows. The nation's trade surplus climbed to a record US$54.5 billion last November and was US$49.6 billion last month.

Goldman Sachs Group Inc says China's official errors and omissions data (figures used by nations to balance cross-border flows when records don't match) point to an unprecedented US$63 billion of capital outflows in the third quarter of 2014. Foreign exchange reserves fell to US$3.84 trillion in December, from an all-time high of US$3.99 trillion in June.

The cost of one-year interest-rate swaps (the fixed payment to receive the floating seven-day repo rate) rose three basis points on Tuesday to 3.24 per cent, data compiled by Bloomberg shows.

The yield on government bonds due September 2024 was steady at 3.43 per cent, according to National Interbank Funding Center prices. BLOOMBERG