China’s Shibor Climbs to Seven-Week High as PBOC Withdraws Funds

(Bloomberg) -- Yuan borrowing costs in Shanghai rose to a seven-week high as China’s central bank pulled funds from the financial system for the second day in a row.

The one-month Shanghai Interbank Offered Rate climbed to 2.74 percent, the highest since Aug. 4, according to the National Interbank Funding Center. The fixing was released after the nation’s monetary authority drained a net 95.1 billion yuan ($14.3 billion) from the financial system, adding to Monday’s 245 billion yuan withdrawal that was the biggest in six months.

The four-week Shibor has advanced for the 10th consecutive day, the longest run of increases since June, amid signs that policy makers want to discourage the excessive use of borrowed money to buy assets such as bonds. The People’s Bank of China has in the past month started to use 14- and 28-day reverse-repurchase agreements -- rather than just seven-day contracts -- in its open-market operations amid speculation it was pushing up the average cost of funds to curb leverage. Money-market rates are rising also before a week-long China holiday.

“Liquidity is tight,” said Li Haitao, head of fixed-income trading at Huafu Securities Co. “The PBOC doesn’t want to loosen any further amid signs economic growth is stabilizing, so its policies are tilted toward controlling runaway use of leverage and financial risks.”

Data released Tuesday showed profits at China’s industrial corporations jumped the most in three years in August, adding to evidence of continued stabilization. New credit, industrial output, fixed-asset investment and retail sales all picked up last month, while private indicators signalled upbeat sentiment in business confidence.

The overnight repurchase rate, a gauge of interbank funding availability, advanced for a second day, adding four basis points to 2.21 percent as of 4:30 p.m. in Shanghai, weighted average prices show. Government bonds fell, with the yield on notes due August 2026 climbing one basis point to 2.73 percent.

The yuan traded in Hong Kong’s offshore market rose 0.02 percent to 6.6820 per dollar, while the onshore rate was little changed as well. The yuan is expected to stay stronger than 6.70 in the run-up to next week’s holidays, Gao Qi, a currency strategist at Scotiabank, wrote in a note Tuesday. Uncertainties arising from the U.S. presidential election and a likely Federal Reserve interest-rate increase are among the factors that can weigh on the yuan, he said.

Trump Effect

A victory by Donald Trump could slow China’s reforms and cause more yuan weakness, Standard Chartered analysts Ding Shuang and Eddie Cheung wrote in a note Monday. Trump, who clashed in a presidential debate with Democratic nominee Hillary Clinton, repeatedly criticized China during the event.

The yuan’s share of global payments fell to 1.86 percent in August, although it retained its position as the fifth most widely used currency, according to data from the Society for Worldwide Interbank Financial Telecommunications.

The Chinese currency will join the International Monetary Fund’s Special Drawing Rights this Saturday, marking a milestone in China’s efforts to build a yuan that reflects the country’s economic and political sway. The SDR, created in 1969, gives IMF member countries who hold it the potential right to obtain any of the currencies in the basket -- currently the dollar, euro, yen and pound -- to meet balance-of-payments needs.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly

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