SHANGHAI, Oct 31: China’s money rates slid on Thursday morning after the central bank injected cash for a second straight session, easing market nervousness that had pushed rates to their highest levels since a credit crunch in June roiled global financial markets.
The rise in rates was caused by the People’s Bank of China’s decision to abstain from injecting cash for three consecutive sessions, leading financial institutions scrambling to find cash for month-end tax payments.
Dealers predicted at the time that rates would ease up after the payment deadline passed, and PBOC officials also conducted a meeting with primary dealers to assure them that liquidity was adequate.
The bank followed up by injecting a net 29.1 billion yuan ($4.8 billion) into money markets this week. It has drained a net 128 billion yuan since Sept. 30.
The benchmark seven-day bond repurchase agreement rate opened at 4.98 percent, down 71 basis points from Wednesday’s close. The overnight rate opened at 4.54 percent, down from 5.30 percent at the previous close, and the 14-day repo rate eased to 5.55 percent from 6.35 percent.
The June credit crunch, which also occurred as a result of the PBOC refraining from injecting enough cash to satisfy month-end demand, saw rates as high as 30 percent. Many economists argued that this was a signal to banks to stop using short-term borrowing in the interbank market to paper over risky lending practices in the shadow banking market.
But few traders and economists believed that the October rate rise was another swipe at shadow lending, with some economists arguing that the PBOC’s behaviour is signalling the beginning of a long-term trend of tighter money.
They argue that signs of economic recovery, combined with rising housing prices and inflationary pressure, mean that the central bank can afford to tighten up on cash without damaging growth. However, there is debate over how far the bank will go.
Some say that recent higher official rates for short-term cash set by the PBOC are evidence that the bank is signalling for a turn in money management.
For example, the PBOC set the official rate for the 14-day reverse repos it issued during open market operations this morning at 4.30 percent, 20 basis points higher than its previous auction price, continuing a trend of steadily higher official yields for short-term instruments.
Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong, predicted that rise before open market operations began on Thursday.
‘This would suggest that policy makers, confident about achieving their growth target, have refocused policy back towards containing risks of the growing leverage in the economy. They are using tighter money market conditions as a tool,’ he wrote in a research note distributed to clients.
There is internal debate over the significance of these settings, however, given they vary widely from actual traded rates. Traders note the official primary rate is not binding on the secondary market, and actual trade can occur above or below the primary rate. ($1 = 6.0938 Chinese yuan) (agencies)
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