China's Central Bank Turns on the Taps, Stemming Slump in Bonds

(Bloomberg) -- China’s central bank boosted its supply of money to the financial system by the most since January, adding to speculation that policy makers are looking to ease concerns sparked by a bond market selloff.

The People’s Bank of China pumped in a net 310 billion yuan ($47 billion) through reverse-repurchase agreements on Thursday, the biggest one-day addition since Jan. 18. That brings this week’s injections to 820 billion yuan, also the most in 10 months.

The move to increase liquidity follows a slump in government debt, with benchmark 10-year yields crossing 4 percent for the first time in three years this week. Losses accelerated after last month’s Communist Party Congress, with investors concerned about a pickup in inflation and prospects for a more intense deleveraging campaign. The Shanghai Composite Index fell for the third day in a row Thursday.

“Policy makers want to improve sentiment because the recent sovereign bond selloff was too quick and started to impact sales of debt, with possible spillover effects on other assets,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “If that continues, the financial market may face systemic risks, which is something the authorities do not want. But this won’t reverse the medium- to long-term trend of bond declines because the fundamental reasons for the drop -- deleveraging, a neutral monetary policy and banks’ lack of liquidity to buy debt -- will persist.”

The PBOC Thursday said that its open-market cash additions were aimed at reducing the effect of corporate tax payments, government debt subscriptions as well as maturities in reverse-repos and Medium-Term Lending Facility funds. While there are 189 billion yuan of MLF contracts due this week, the central bank offered 404 billion yuan of the loans on Nov. 3, which was 8 billion yuan more than maturities for the full month.

The yield on the benchmark 10-year government bond fell for a second day, dropping three basis points to 3.94 percent in Shanghai. The seven-day repurchase rate, China’s money-market benchmark, dropped nine basis points to 2.89 percent, while the Shanghai Composite Index retreated 0.1 percent.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net, Tian Chen in Beijing at tchen259@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly, Sarah McDonald

©2017 Bloomberg L.P.

With assistance from Helen Sun, Tian Chen