China conducts first reverse repos in a year as outflows pick up

[SHANGHAI] China's central bank used short-term tools it hasn't employed in a year to address a seasonal cash squeeze that's being exacerbated by capital outflows.

The People's Bank of China used reverse-repurchase agreements to inject 50 billion yuan (US$8.05 billion), it said in a statement Thursday.

The central bank also rolled over 269.5 billion yuan of three-month loans extended to lenders in October and used the medium-term lending facility to add a further 50 billion yuan to smooth supply before the Lunar New Year holiday, it said late Wednesday. An auction of 50 billion yuan of six- month treasury deposits also added cash today.

"The twin moves to roll over loans and using repos may signal there will be no broad-based easing such as a reserve- requirement-ratio cut in the first quarter," said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd in Hong Kong. The PBOC's stance is less dovish than that in other major economies, he added.

Canada's central bank unexpectedly cut interest rates on Wednesday and India's surprised markets last week by lowering borrowing costs outside its normal schedule of meetings. The European Central Bank is poised on Thursday to announce it will buy government bonds.

The PBOC reduced its benchmark rates in November for the first time in two years to help revive an economy expanding at the slowest pace in more than two decades.

The seven-day repurchase rate, a gauge of interbank funding availability, rose 16 basis points to a two-week high of 4.13 per cent in Shanghai, according to a weighted average from the National Interbank Funding Center. The rate rose 21 basis points on Wednesday, the most since December. The weeklong Lunar New Year holiday starts Feb. 18.

The seven-day reverse repos auctioned on Thursday were priced to yield 3.85 per cent, the PBOC said. The treasury deposits yielded 4.68 per cent, up from 4.32 per cent when the same amount of similar-term funds was auctioned to commercial banks in July. The central bank conducted seven- and 14-day reverse repos 12 months ago, before the Lunar New Year break that began on Jan 31, 2014.

"There may be some irregular capital inflows and outflows around the world," PBOC Governor Zhou Xiaochuan said Wednesday at a World Economic Forum panel in Davos, Switzerland. "That may also be a source of volatility."

The PBOC needs to cut lenders' reserve requirements this quarter in order to compensate for outflows and push the seven- day repo rate back to a range of 3 per cent to 3.5 per cent, said Dariusz Kowalczyk, senior economist at Credit Agricole CIB. That view was echoed by Yan Yan, an analyst at China Guangfa Bank Co. in Shanghai, who said the resumption of reverse repos will help ease concern that policy was tightening.

China is expected to record deficits in its capital account in the fourth quarter, Guan Tao, head of the balance of payments department at China's State Administration of Foreign Exchange, said at a briefing in Beijing. Yuan positions on the People's Bank of China's balance sheet fell 128.9 billion yuan in December from a month earlier, the most since 2003, official data show. The nation's trade surplus climbed to a record US$54.5 billion in 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 a record US$63 billion of capital outflows in the third quarter of 2014. China's foreign-exchange reserves fell to US$3.84 trillion in December, from an all-time high of US$3.99 trillion in June.

Chinese banks sold US$63.5 billion more foreign exchange than they bought in the last five months, trimming net purchases for 2014 to US$125.8 billion, the currency regulator reported today.

"No one is actually selling US dollars to the banks," said Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia. "From that perspective, on a net basis, it's negative for liquidity."

One-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose six basis points to 3.26 per cent, data compiled by Bloomberg show. The yield on government bonds due September 2024 was unchanged at 3.46 per cent, National Interbank Funding Center prices show.

"We are in a continuing easing cycle so we need to inject more liquidity," said Becky Liu, a rates strategist at Standard Chartered Plc in Hong Kong. "At the same time, I don't think they want to do a broad-based reserve-requirement cut for the moment. Injecting liquidity to smooth out interbank liquidity via reverse repos is a better way."

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