CHINA’S cash squeeze extended with some signs of disruption to trading, as a liquidity infusion from Beijing failed to counteract a spike in demand for funds.
The volume-weighted average rate of seven-day repurchase transactions in the money market, a gauge of borrowing costs, climbed to 2.32 per cent, the highest since October 2023. Late Wednesday (Jan 15), there were some failed trades and a 10-minute delay to the official close of a clearing system, according to traders who asked not to be identified as they are not allowed to speak publicly.
The People’s Bank of China (PBOC) injected another 336.4 billion yuan (S$62.8 billion) of short-term funds into the banking system on Thursday, following its second-largest ever cash infusion in the previous session. That was aimed at offsetting the impact of the expiration of medium-term lending, peak tax season and cash demand before the Chinese New Year holidays, and to keep liquidity ample, it said.
China’s week-long Chinese New Year holiday begins this year on Jan 28.
Complicating matters for the PBOC is pressure on the yuan and government bond yields from concerns about China’s economic prospects as a potential trade war looms. Authorities may be reluctant to loosen liquidity too much lest it weigh further on the currency and yields, and induce capital outflows.
Seven-day liquidity “may be disappointing to the market although hope remains for longer-term liquidity injection later this month”, said Frances Cheung, strategist at OCBC. “We expect additional liquidity injections next week but that may only be enough to meet demand, not necessarily loosening the condition a lot.”
Daily trading volume for so-called overnight pledged repurchase agreements declined for a seventh straight session on Wednesday to 4.6 trillion yuan, a sign of shrinking liquidity in the market. The gap between repo rates of whole-market deals and among-bank trades has been widening in the past few sessions, indicating funding pressure could be worse for non-bank financial institutions including fund houses, securities firms and wealth managers.
Liquidity conditions in the interbank money market remained tight on Thursday, with some institutions paying as much as 9 per cent to obtain overnight funds, according to traders who asked not to be identified as they are not allowed to speak publicly.
Seasonal demand for cash is expected to increase further ahead of the holiday, which this year begins on Jan 28. Chinese residents typically draw more cash from banks to prepare for spending and traditional gift-giving. BLOOMBERG
