China’s Overnight Repo Rate Slides After PBOC’s Cash Boost

(Bloomberg) -- China’s overnight borrowing costs declined as the central bank continued to add cash to a banking system strained by tax payments, local-government debt issuance and fading monetary easing hopes.

The overnight interbank repo rate fell seven basis points to 1.54%, the lowest since Sept. 29 and near a nine-month low. The People’s Bank of China injected a net 190 billion yuan ($30 billion) into the financial system via seven-day reverse repurchase agreements for a second straight day Tuesday, which was the biggest single-day addition since January.

“These operations help soothe the market,” said Frances Cheung, rates strategist at Oversea-Chinese Banking Corp in Singapore. “Still, this is short-term money while the liquidity tightness is due to longer-term/permanent payment needs.” 

The downside for local rates is limited unless there is a provision of longer-term liquidity, Cheung added.

China’s overnight rate declined for a fifth straight session, a stretch matched by PBOC cash additions. However, the seven-day borrowing rate remains elevated, reflecting liquidity tightness covering the month-end period. 

Moreover, regional authorities plan to sell 544 billion yuan of bonds this week, the second-largest weekly issuance in history, according to data compiled by Bloomberg. 

Reserve Requirement

The cash injections have dampened hopes of a reduction in banks’ reserve requirement ratios, keeping borrowing costs elevated. That’s because policymakers are seeking to strike a balance between boosting an economy hit by new Covid-19 outbreaks and China Evergrande Group’s debt crisis, and keeping inflation anchored.

“Overall we don’t see excessive liquidity injections beyond the seasonal demand and expect the PBOC to return to a liquidity drain at the beginning of November,” said Liu Peiqian, China economist at Natwest Markets Plc in Singapore. 

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