China’s central bank cuts cash operation to record low as bond rally deepens

CHINA’S central bank reduced the size of its daily open-market operation to a record low, extending efforts to absorb excess cash as a rally in bonds drove benchmark yields to their lowest since August.

The People’s Bank of China (PBOC) lent banks 200 million yuan (S$38 million) via seven-day reverse repurchase agreements on Tuesday (Jun 2), the lowest-ever amount in a daily open market operation, according to data compiled by Bloomberg.

Barely offsetting maturities due on the day, the operation resulted in a net withdrawal of 248.8 billion yuan of liquidity from the banking system.

The move marks the latest step by the central bank to mop up excess funds that accumulated as loan growth slowed sharply.

The liquidity glut has helped drive borrowing costs to multi-year lows and fuelled a rally in bonds. The yield on benchmark 10-year notes ended at 1.7 per cent on Monday, the lowest since August, as a private gauge of manufacturing activity showed the world’s second-largest economy is losing some steam.

The yield edged up slightly on Tuesday. Futures on 30-year government notes dropped 0.1 per cent, snapping a seven-day gaining strike.

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“The PBOC turning more proactive in draining excess liquidity suggests it does not want a rapid decline in bond yields,” said Guannan Zhou, an analyst at Huachuang Securities. Further, demand for cash is typically low at the beginning of a month, she said.

The PBOC has withdrawn a total of 1.75 trillion yuan of medium- to long-term liquidity over the past three months through instruments with maturities ranging from three months to one year, according to Bloomberg calculations. BLOOMBERG