China Money Rate Rises to 18-Month High as Yuan Spurs Outflows

(Bloomberg) -- China’s overnight money rate climbed to the highest level in 18 months, fueled by capital outflows as the yuan weakened to a six-year low.

The one-day repurchase rate, a gauge of interbank funding availability, jumped 17 basis points, the most since February, to 2.41 percent, weighted average prices show. That’s the highest since April 2015. The rates rose after the People’s Bank of China weakened its daily reference rate for the yuan for the third day in a row.

“Yuan depreciation-fueled outflows are causing a shortfall in base money supply and tightening liquidity,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “This will add pressure to institutions which are highly leveraged in bond investments, if the tightness continues.”

Liquidity in China’s interbank market has been hard hit by the currency’s accelerated decline. A net $44.7 billion worth of yuan payments left the nation last month, according to data released by the State Administration of Foreign Exchange. That’s the most since the government started publishing the figures in 2010, and compares with August’s outflow of $27.7 billion. Goldman Sachs Group Inc. warned Friday that China’s currency outflows have risen to $500 billion this year.

The central bank stepped up its open-market operations Tuesday, injecting a net 175 billion yuan ($25.8 billion) into the financial system, the most in six years. That brings total injections for the past week to 535 billion yuan. The PBOC’s hand has also been forced by a switch in August to longer-maturity open-market instruments, which has driven up short-term rates.

Government bonds declined, with the yield on notes due August 2026 climbing two basis points to 2.70 percent, after rising the most in almost two months on Monday, according to National Interbank Funding Center prices. The cost of one-year interest-rate swaps, the fixed payment to receive the seven-day repo rate, was little changed at 2.66 percent, near the highest level since April 29, data compiled by Bloomberg show.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Robin Ganguly at rganguly1@bloomberg.net, Gregory Turk

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