Money

China repo rate surges to 19-month high

(Agencies)
Updated: 2010-06-01 16:01

SINGAPORE: China's benchmark 7-day repo rate surged to a 19-month high on Tuesday owing to a tightness in the cash market that traders attributed to a variety of factors, including fund-raising by some lenders and higher investments in better yielding central bank bills.

In China, the weighted average seven-day repo rate, the most widely watched measure of short-term liquidity, surged on Tuesday to 3.1976 percent, up from 2.5135 percent on Monday, its highest since October 2008.

That followed an auction of the Chinese central bank's one-year bills, at which yields unexpectedly rose for the first time since January, reflecting a funding squeeze ahead of a wave of fundraising by Chinese lenders.

The People's Bank of China auctioned 15 billion yuan ($2.2 billion) of one-year bills at a yield of 2.0096 percent, 8 basis points higher than where it had been held for more than four months. Traders cited Bank of China's sale of 40 billion yuan ($5.9 billion) of convertible bonds this week, subscriptions for which occur on Wednesday, as one of the main factors behind tight monetary conditions. The subscription money will be tied up until June 7, potentially locking up amounts several times the 40 billion yuan during that period.

Other factors for the tighter cash conditions could be a diversion of funds to central bank bills, where yields have been climbing, or because lenders are trying to raise mandatory capital requirements, analysts said.

Related readings:  PBOC sells $2.2b?one-year bills  China PBOC raises 3-month bill yield, lowers 3-year  PBOC report signals currency policy change  Central bank to issue 120b yuan 3-year bills

"There have been rumors that one of the major banks will stop lending out money and go for PBOC bills instead," Frances Cheung, a strategist at Credit Agricole CIB, said in an interview on Reuters Insider.

"While it is still a rumor we believe there is incentive for banks in China to cut down on their lending in this time of uncertainty and buy 3-year PBOC bills where the yield is quite attractive."

Cheung also said most market participants expected the repo rate will not remain high and suspected the pressure was due to funding issues of some financial institutions meeting capital adequacy ratios.

The Chinese central bank has indeed started injecting cash into the money market. It injected 145 billion yuan last week, and with a total of 144 billion in bills and repos due to mature this week, it appears on track to inject funds again this week, having sold only 15 billion yuan in bills so far.