SHANGHAI, Oct 31 (Reuters) – China’s short-term interest rates rose sharply on Tuesday, the last trading day of the month, on the back of seasonal demand for cash, but markets warned that the People’s Bank of China is looking for more liquidity in the coming months. It is expected that the injection will be carried out. This is to support the fragile economic recovery.
The benchmark overnight repo rate traded in the interbank market rose as much as 255 basis points to 4% in morning trading, its highest level since February 28. The most recent trade on Tuesday afternoon was 1.8658%.
Financial institutions need to maintain high cash positions to meet various regulatory checks and administrative requirements, making many banks reluctant to lend to peers and increasing demand for cash at the end of the month. Borrowing costs have increased.
“The liquidity crunch caught us off guard and the prices suddenly shot up,” said a trader at a brokerage firm.
The People’s Bank of China (PBOC) on Tuesday injected a net 19 billion yuan ($2.6 billion) through open market operations, but some debt The trader said the amount was too small – the end.
However, in the derivatives market, investors do not expect such liquidity strains to persist. They are betting on liquidity injections and possible interest rate cuts to support a newly approved 1 trillion yuan ($136.67 billion) bond sale.
One-year interest rate swaps, which gauge investors’ expectations for future yields, fell seven basis points to 2.02% this week after China announced last week that it would issue new bonds to help rebuild disaster-stricken areas. Ta.
Francis Chan, interest rate strategist at OCBC Bank, said: “Repo IRS were weak this morning as China’s PMI was lower than expected, while markets were looking for liquidity injections to cushion the impact of increased bond supply. “Expectations continue to be maintained.” .
“We see an increased likelihood of a reserve reserve ratio (RRR) cut. This would be beneficial as a 25 basis point cut would free up liquidity and cover most of the additional bond issuance.”
These sovereign debt issuances by China will not change the central government’s bond issuance schedule during the fourth quarter, sources told Reuters.
Investors are betting the People’s Bank of China will help by further easing monetary policy as the Chinese government accelerates spending plans to shore up an economic recovery that has failed this year.
Ming Ming, chief economist at CITIC Securities, expects repo rates to narrow in November as the central bank is likely to maintain an accommodative bias in its monetary policy stance.
“There is still a possibility of RRR reduction and excess liquidity injection due to Medium Term Lending Facility (MLF) rollover this year,” Min said.
(1 dollar = 7.3167 Chinese yuan)
Reported by Shanghai Newsroom.Editing: Kim Coghill
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