China Money Rate Rises to 14-Month High as PBOC Drains More Cash

(Bloomberg) -- China’s benchmark money-market rate climbed to a 14-month high as the central bank pulled funds from the financial system and commercial lenders stocked up on cash to meet quarter-end requirements.

The seven-day repurchase rate, the benchmark gauge of funding availability in the financial system, rose 12 basis points to 2.75 percent as of 5:07 p.m. in Shanghai. That’s the most expensive since July last year. Shanghai Interbank Offered Rates with terms ranging from one day to a month all increased. The weighted average repurchase rate, a gauge of money-market rates of different tenors, advanced to 2.59 percent on Wednesday, the highest since April 2015.

The People’s Bank of China has drained a net 370.1 billion yuan ($55.4 billion) from the financial system so far this week even as commercial lenders hoard cash to meet quarter-end regulatory checks as local markets are closed next week. The monetary authority has in the past month started using 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.

“It’s quite unusual for the central bank to pull that much money at the quarter-end and before the holidays, as normally it should inject cash,” said Ming Ming, head of fixed income research at Citic Securities Co. “This shows the PBOC’s determination to keep the money market tightly balanced, and this could bring liquidity risks to the bond market.”

The higher money rates are increasing the cost of carry trade, with the difference between the 10-year sovereign yield and the overnight repo rate narrowing to the least since April 2015. The yield on sovereign notes due August 2026 rose one basis point to 2.74 percent, according to National Interbank Funding Center prices.

In the currency market, the yuan strengthened 0.1 percent to 6.6680 per dollar in Shanghai, while the exchange rate in Hong Kong’s offshore market climbed 0.05 percent as trading waned before next week’s holiday and ahead of the currency’s entry into the International Monetary Fund’s reserves basket this Saturday.

A gauge of expected price swings in the yuan jumped by the most since February after slipping to a one-year low Wednesday. The yuan’s one-month implied volatility, which is used to price options, advanced 102 basis points to 4.6 percent, according to data compiled by Bloomberg. Australia & New Zealand Banking Group Ltd. suggested the rise was due to concern over the U.S. presidential election.

“It dropped to a key support level, so a rebound isn’t a total surprise,” said said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “Also, this will take us to late October, which is close to the U.S. election, where we expect heightened uncertainty pending the outcome.”

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

©2016 Bloomberg L.P.