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[SHANGHAI Demand for cash in China's money market sank to an eight-month low in October as the central bank intensified efforts to reduce leverage in the financial system.
Transactions of overnight repurchase agreements in October tumbled 18 per cent from a month earlier to 32 trillion yuan (S$6.5 trillion), according to National Interbank Funding Center data. Turnover is down for a second month, after reaching a record 52 trillion yuan in August amid speculation investors were borrowing money to invest in an unprecedented bond rally.
The pullback comes after the People's Bank of China extended the tenors of lending tools it offered investors, making it more expensive to access financing for bond purchases. The nation's benchmark 10-year bond yield dropped to a decade low on Aug 15 before the PBOC's return to using the longer-term repos sparked a selloff. There are increasing signs of stress in the interbank market, with one-year interest-rate swaps posting their biggest monthly increase since April and the overnight repo rate averaging the highest in 18 months.
"The bond market will inevitably be under pressure for corrections as it has accumulated a lot of leverage," said Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc in Singapore. "In particular, corporate debt will see a divergence in pricing. This will lead to an increasing number of credit events." Policy makers have extended their battle against leverage to the property sector as well, with at least 21 cities introducing purchase restrictions and toughening mortgage lending since late September. Finance companies need to prepare for "tight days" as monetary policy shifts to focus on deleveraging, a China Securities Journal Oct 28 report cited an unidentified analyst as saying.
China's total debt ballooned over the past decade to 247 per cent of gross domestic product in 2015, according to Bloomberg Intelligence. China's short-term goal is to bring down leverage ratio growth, PBOC Deputy Governor Yi Gang said in September.
"The turnover drop shows the PBOC's anti-leverage efforts are taking effect," said Meng Xiangjuan, Shanghai-based head of fixed-income research at SWS Research Co, a unit of Shenwan Hongyuan Group Co. "Lenders are borrowing more long-term funds, and their costs are certainly rising."
The cost of one-year rate swaps, the fixed payment to receive the floating seven-day repo rate, retreated two basis points to 2.75 per cent. Government bonds were unchanged, with the 10-year yield at 2.75 per cent. The yield climbed five basis points on Monday, the most since Aug. 30.