Chinese credit fears ease on Central Bank cash injection

Tuesday 24 December 2013 09.18
Rising interest rates in the world's second-largest economy are posing a risk to growth
Rising interest rates in the world's second-largest economy are posing a risk to growth

China’s benchmark money-market rate fell the most since February 2011 after the central bank injected funds via open-market operations for the first time in three weeks, helping alleviate a cash crunch.

The People’s Bank of China has auctioned 29 billion yuan (€3.5 billion) of seven-day reverse-repurchase agreements at a yield of 4.1%.

This came after 300 billion yuan of targeted cash injections last week failed to hold borrowing costs down.

The seven-day repurchase rate, a gauge of funding availability in the banking system, tumbled 344 basis points, or 3.44 percentage points, to 5.4%, according to a daily fixing from the National Interbank Funding Center.

It more than doubled to 8.84% in the last five days. The Shanghai Composite Index of shares gained 0.2% today, after climbing 0.2% from a four-month low yesterday.

Rising interest rates in the world’s second-largest economy pose a risk to growth, which economists predict will be the slowest in 14 years in 2013, and heighten the risk of defaults.

“The central bank is under pressure so it conducted the operations today, which was unexpected by us,” said Xu Hanfei, an analyst at Guotai Junan Securities Co. in Shanghai.

“The tight cash situation is expected to ease toward year-end. If the seven-day repo stays below 6%, the PBOC can hold off from offering reverse repos in Thursday’s auction window.”

Citic Securities Co. and Guotai Junan, two of China’s three biggest securities firms by assets, predicted the central bank would refrain from using open-market operations to inject funds this week. Haitong Securities Co., which ranks second, forecast funds would be made available to stop interest rates climbing too high.

The last such cash injection was on 3 December, when the monetary authority added 18 billion yuan.

“The PBOC won’t change its neutral-to-tight monetary policy, but saving the market looks to be the only option now,” Wei Fengchun, head of macro strategy at Shenzhen-based Bosera Asset Management Co., wrote in a note today.

The relatively tight stance of the PBOC along with increased cash demand at year-end, delays to the transfer of fiscal deposits and the scaling back of US monetary stimulus all contributed to the recent spike in rates, Wei said.

China Coal Energy Co. cancelled a 1 billion yuan sale of seven-year bonds that was scheduled for today due to market turbulence, according to a statement posted on the website of Shanghai Clearing House.

The overnight repo rate dropped 24 basis points to 4.2%, while the 14-day declined 354 basis points to 5.96%, daily fixings show.

The yield on August 2023 government debt was unchanged at 4.6%, according to the Interbank Funding Center. The 10-year yield reached 4.72% on 20 November, the highest in ChinaBond data going back to 2007.