China c.bank increases cash injections to allay tightening concerns
SHANGHAI, Aug. 25 (Reuters) – China’s central bank on Wednesday stepped up its short-term injections of funds into the financial system, in a bid to allay market concerns over tight liquidity.
Primary interbank monetary rates eased after hitting multi-month highs earlier this week, amid growing investor concerns over the acceleration in the supply of local government bonds and higher demand for liquidity in month-end.
The People’s Bank of China (PBOC) on Wednesday said it offered 50 billion yuan ($ 7.72 billion) as part of seven-day repurchases to the banking system, while it only injected most of the time than 10 billion yuan every day during the month.
The central bank said on its website that the move was aimed at “keeping liquidity conditions stable at the end of the month.”
In a separate statement released Tuesday evening, the PBOC announced that it would auction an additional 70 billion yuan in one-month cash deposits on Friday.
Traders said that while the volume was not huge, the official intention was clear enough to support general liquidity and improve market sentiment.
The volume-weighted average rate of the benchmark overnight traded on the interbank market fell to 2.2025% on Wednesday morning, down 6.6 basis points (bps) from its close previous, which was the highest since June 22.
Meanwhile, the benchmark 10-year Treasury futures contract for December delivery, the most-traded contract, rose 0.25%, while China’s 10-year government bond yield fell. fell 1.5 basis points to 2.835%.
Ming Ming, head of bond research at Citic Securities, expects the central bank to maintain a near-term loosening bias.
“In the context of recent credit risk events and tighter regulatory oversight (…)
Nevertheless, the uncertainty surrounding the next issuance of local government bonds helped to contain the fall in interbank rates.
Emissions in August have so far reached around 860 billion yuan, according to Reuters calculations based on official statistics, more than 30% above July’s total emissions and not far from this year’s peak of 875.3 billion yuan in May.
The pace of local government borrowing has been generally slow this year, with a total of about 1.35 trillion yuan issued in the first seven months, or about 36% of this year’s special bond quota of 3, 65 trillion yuan.
Guotai Junan analysts expected the aggregate supply of government bonds to reach 1.2 trillion yuan in August and 1.2 trillion yuan in September if the government plans to use up all the quota by the end of this year.
“If some infrastructure projects are to rely on the issuance of local government bonds, the government should intend to reduce bond yields,” said Iris Pang, Greater China economist at ING.
“To achieve this, the PBOC can reduce the reserve requirement ratio (RRR) by 0.5 percentage point in the fourth quarter of this year.”
ING has downgraded its forecast for Chinese GDP growth for the second half of 2021, citing disruption due to microchip shortages and COVID outbreaks as the two main reasons. It now expects growth of 4.5% over one year in the third quarter and 5.0% in the fourth quarter.
($ 1 = 6.4735 Chinese yuan)
Reporting by Winni Zhou and Andrew Galbraith; Editing by Christopher Cushing and Kim Coghill
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