China’s money market shows signs of liquidity tightness towards month-end

Cash conditions in China’s money market showed signs of tightness on Monday (Nov 27), as market participants grew cautious about month-end demand and a recent liquidity squeeze remained fresh in memory.

Despite fresh liquidity injections by the central bank to calm the market, traders and analysts said borrowing costs for the funds that could help financial institutions, especially non-banks, to tide over the critical month-end period remained high.

The price of the benchmark seven-day repos traded in the interbank market hit a high of 2.8 per cent on Monday, the highest level since Oct 31. Meanwhile, the borrowing cost of such repos for non-bank financial institutions was about 3.5 per cent, according to traders.

“Money that can help span the month-end has tightening bias, and it’s expensive for non-banks,” said a trader at a Chinese bank.

Some traders also said the general sentiment was cautious due largely to fears of another cash crunch.

Routine month-end demand for cash in China’s banking system snowballed into a scramble on Oct 31, which pushed short-term funding rates as high as 50 per cent in some cases. The incident prompted the authorities to investigate.

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“The interbank money market now relies heavily on reverse repos, and bank’s willingness to lend to their peers is low, and this may be one of the factors that triggers fluctuations in the funding costs towards the month-end,” said Liu Yu, analyst at GF Securities.

The People’s Bank of China (PBOC) injected a net US$41.05 billion through reverse repos in open market operations on Monday, the third straight session of net cash offerings into the financial system.

The interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs), which measures short-term interbank borrowing costs, has been persistently trading higher to hit an over seven-month high of 2.6279 per cent.

NCDs have been a popular short-term debt instrument used by financial institutions in the interbank market for financing.

Sources told Reuters earlier this month that the PBOC asked some lenders to cap interest rates on an interbank debt instrument, referring to the rising short-term yields on bank debt and strains in funding markets. REUTERS