China cash charges hit 21-month excessive on vacation demand, coverage tightening worries

FILE PHOTO: The headquarters of People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China on September 28, 2018. REUTERS / Jason Lee

Emerging markets

Reuters employees

SHANGHAI (Reuters) – China’s short-term monetary interest rates extended rallies to over 21-month highs on Wednesday as investors feared policymakers may move to a tighter stance to cool price and property market gains.

Unlike in recent years, the central bank has not made any net liquidity injections into the banking system to meet the strong demand for cash for the long New Year holidays. In fact, it used up the funds and surprised dealers.

The vacation starts on February 11th of this year.

On Wednesday, the volume-weighted average price of the Chinese benchmark overnight repurchase agreements (repo) traded on the interbank market rose to 2.976% by late morning, an increase of 20.14 basis points on the day and the highest level since April 17, 2019.

The 7-day repo rose to 6.0%, its highest level since June 27, 2018.

China’s major stock indices were up more than 4% this month before pulling back in recent days.

“Cash conditions are very tight today,” said a trader at a foreign bank.

“Investors have given up hope for high-quality liquidity support before the New Year celebrations.”

People’s Bank of China (PBOC) injected 180 billion yuan ($ 27.86 billion) through open market operations at the beginning of the session, as opposed to at least 2 billion yuan a day in previous sessions, but still 100 billion yuan on a net basis 280 billion yuan withdrawn should expire.

The PBOC said the injection was intended to “keep the liquidity of the banking system adequate” as budget spending soared towards the end of the month. [CN/MMT]

A second trader at a Chinese bank said the PBOC’s moves suggested regulators were keen to reduce leverage in financial markets as many investors were betting on relatively loose monetary terms ahead of the holiday.

PBOC advisor Ma Jun said this week that if China fails to adequately change its monetary policy stance in the face of recent rapidly growing leverage, the risk of asset bubbles will remain.

“It is the forerunner that the Chinese central bank begins to normalize its monetary policy,” said Marco Sun, a financial analyst at MUFG Bank.

Other economists also warned that the central bank will gradually weaken its policy stance this year after massive emergency measures to cushion the shock from the coronavirus pandemic in 2020.

“Monetary policy in 2021 will be a gradual normalization that depends on COVID-19,” said Lu Ting, China’s chief economist at Nomura.

“With the reintroduction of lockdowns and travel bans due to the recent wave of COVID-19, we believe the PBOC will be marginally slowing its normalization.”

However, the state-run Securities Times in a front-page comment urged investors not to exaggerate the impact of the central bank’s short-term liquidity operations on the equity and bond markets.

The PBOC was expected to resume the 14 day reverse repo and run medium term credit facilities (MLF) to increase liquidity and reduce financing costs to more reasonable levels.

Reporting by Winni Zhou and Andrew Galbraith; Editing by Tom Hogue and Kim Coghill

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