Chinese central bank orders banks to keep a lid on lending rates as it seeks to prevent cash crunch
The People's Bank of China (PBOC) is ordering banks to keep a lid on lending rates charged to one another as it seeks to prevent a pre-holiday surge in demand for funds, leading to a cash crunch at a time of record capital outflows.
China's monetary authority told some banks to cancel repurchase agreements that were conducted at interest rates it deemed excessive, according to people familiar with the matter, who asked not to be identified.
The authority also advised institutions to keep rates on the short-term loans below certain levels, though not all parties were given the same limit, they said. Seven-day repos were conducted last Wednesday at 4.5pc, the highest level since June and double the rate that the PBOC charges for similar term funds in its open-market operations.
The directives come at a time when the PBOC is flooding the financial system with money to keep borrowing costs from climbing amid China's weakest economic growth in a quarter of a century.
Using a variety of lending tools, the authority has injected more than 1.3 trillion yuan (€183bn) into the financial system this month. Capital outflows were an estimated €90bn in December, according to Goldman Sachs Group, and Guotai Junan Securities sees cash demand growing by about 3 trillion yuan in the run-up to the week-long Chinese New Year holiday starting February 8.
"The huge liquidity injections and administrative measures indicate the central bank's determination to tame the money rates," said Qi Gao, a Hong Kong-based strategist at Scotiabank.
"So it looks like the money market will be able to remain largely stable ahead of the holidays, and there's no reason to panic."
The benchmark seven-day repo rate fell eight basis points to 2.34pc on Friday, a weighted average from the National Interbank Funding Centre shows. That's the biggest drop this year. The overnight rate declined six basis points to 2.03pc, after transactions were recorded this week at levels as high as 5pc.
China's central bank didn't clarify whether or not it had asked lenders to cancel certain repo agreements and on its guidance on maximum rates for such loans. It has so far this month injected a net 612.5bn yuan through its medium-term lending facility, 150bn yuan via short-term liquidity operations and 545bn yuan in open-market operations.
In addition, it auctioned 80bn yuan of nine-month treasury deposits on behalf of the Ministry of Finance. "It is one of the PBOC's priorities to stabilise interbank rates ahead of the Chinese New Year," said Albert Leung, a Hong Kong-based rates strategist at Nomura. "They don't want to see a liquidity squeeze like they had in previous years."