China Money Rate Slides Most in Four Weeks as PBOC Injects Cash

Jan 20, 2014 8:38 pm ET

Jan. 21 (Bloomberg) -- China’s money-market rates slid the most in four weeks as the central bank added more than 255 billion yuan ($42 billion) to the financial system and expanded a lending facility to meet Lunar New Year demand for cash.

The benchmark seven-day repurchase rate, a gauge of interbank funding availability, slumped 134 basis points to 5.25 percent as of 9:22 a.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. It surged 142 basis points yesterday, the most in seven months. One-year swaps that exchange fixed payments for the floating seven-day repo rate, fell 15 basis points, or 0.15 percentage point, to 4.87 percent, based on data compiled by Bloomberg.

The People’s Bank of China said it added funds to larger banks yesterday using its Standing Lending Facility and, according to traders, conducted 255 billion yuan of reverse- repurchase agreements today. The central bank is also allowing small- and medium-sized banks in 10 regions to tap its SLF on a trial basis before the week-long Lunar New Year holiday starts Jan. 31.

“These are significant steps by the PBOC,” Zhang Zhiwei, a Hong Kong-based economist at Nomura Holdings Inc., wrote today. “These measures should help to reduce the liquidity risk in the interbank market and the default risk in the corporate sector over the next several weeks. It also helps to reduce the default risk of small banks.”

Rate Thresholds

Smaller lenders can seek funding before the holiday via the SLF when the seven-day repo rate exceeds 7 percent, according to a document signed by the monetary authority’s Guangzhou branch and obtained yesterday by Bloomberg News. Other thresholds are for the overnight repo rate to breach 5 percent and the 14-day to climb above 8 percent. Local branches of the PBOC will supply cash at those rates, the document said.

The overnight repo rate fell 82 basis points today to 3.48 percent and the 14-day rate dropped 40 basis points to 5.57 percent, weighted averages show. That follows increases yesterday of 132 basis points and 26 basis points, respectively.

The PBOC will conduct the SLF trials in the cities of Beijing and Shenzhen, as well as Jiangsu, Shandong, Guangdong, Hebei, Shanxi, Zhejiang, Jilin and Henan provinces, according to the statement on its website. A 120 billion yuan quota has been set aside for the trial, according to two traders familiar with the matter, who asked not to be identified as the information is confidential.

“It’s correct to target the smaller banks as they are the ones that always face cash shortages before the Lunar New Year,” said Tse Kwok Leung, the Hong Kong-based head of policy and economic research at Bank of China (Hong Kong) Ltd. “That is helping ease market concerns over liquidity and hence the swaps decline. The facility is more effective than injections via reverse repos, which usually guide funds toward the major banks.”

Default Risks

Industrial & Commercial Bank of China Ltd. last week rejected calls to bail out a 3 billion yuan trust product it distributed for China Credit Trust Co., a bank official with knowledge of the matter said. China Credit raised funds for a coal miner that subsequently collapsed.

The State Council has tightened controls on so-called shadow banking with rules targeting off-the-book loans to clamp down on hidden lending. Shadow banking includes activities ranging from trusts and private lending between individuals to banks’ off-balance-sheet savings vehicles, known as wealth- management products.

The Shanghai Composite Index of Stocks slumped to below 2,000 for the first time in almost six months yesterday.

“The recent news of potential trust default and the fact that the Shanghai stock market index dropped below 2,000 on 20 January suggest market confidence is weak, which may also have put pressure on the government to take action and restore confidence,” Nomura’s Zhang said.

--Helen Sun and Fion Li, with assistance from Xin Zhou in Beijing. Editor: James Regan