China’s short-term borrowing costs are climbing back toward a two-year high, fueling expectations the central bank will respond with increased cash injections amid global market volatility and difficulties in domestic bond trading.
(Bloomberg) — China’s short-term borrowing costs are climbing back toward a two-year high, fueling expectations the central bank will respond with increased cash injections amid global market volatility and difficulties in domestic bond trading.
The overnight repo rate climbed to 2.3%, as demand for cash rose for monthly tax payments and ongoing credit expansion. In February when the rate last hit that level, the People’s Bank of China boosted its open market cash injections to a record in a bid to rein in the surge.
The climb in borrowing costs may add to jitters on Chinese assets as fears from a nascent banking crisis spread through global markets. A worsening yuan liquidity squeeze could also weigh on the local bond market, already under pressure this week after money brokers halted data feeds to popular trading platforms on a reported regulatory request.
“We see potentially larger open market operations in upcoming sessions to ensure stability of interbank liquidity, in light of both domestic and external market considerations near term,” said Becky Liu, Head of China Macro Strategy at Standard Chartered Bank in Hong Kong. Given how vulnerable external markets are, authorities “would want to avoid ultra volatility.”
The PBOC injected a net 106 billion yuan ($15.4 billion) via reverse repo on Thursday, the highest this month. The central bank ramped up one-year policy loan support on Wednesday and China is still likely to cut banks’ reserve requirement ratios, a local newspaper reported citing analysts.
To be sure, the PBOC may still keep its liquidity support measured, which means market rates may not fall too much from current levels.
“In case there’s strong capital outflows due to strong global market de-leveraging, a not-so-low interbank rate will make the yuan slightly more defensive too,” Standard Chartered’s Liu added.
The yuan weakened for a third session to just over 6.90 per dollar Thursday, while Chinese stocks fell with peers. The country’s 10-year government bond yield has been largely stable around 2.87% this week, while its Treasury equivalent has swung wildly, falling more than 20 basis points as traders pulled back bets on Federal Reserve rate hikes.
“The PBOC has always stayed vigilant and will step in if needed,” said Stephen Chiu, chief Asia FX & Rates Strategist at Bloomberg Intelligence. “Money market rates will stay in a range and China tends to be more isolated to a global rout, as always.”
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