An onslaught of maturing funds may see China’s central bank reaching for the fire hose.
The People’s Bank of China hasn’t pumped cash into the financial system via open-market operations for 15 days, the longest drought since March. A combination of curbs on loan issuance, a stronger yuan and seasonality factors meant they didn’t have to, with a rush of liquidity spurring policy makers to do the opposite, and drain funds.
But that situation could reverse as soon as this week, when a total of 459.5 billion yuan ($67.6 billion) of funds issued via reverse-repurchase agreements and the PBOC’s medium-term lending facility comes due — the most since the week ending June 5. Further mopping up funds, government issuers and policy banks will sell at least 483 billion yuan of bonds by Friday. And then there’s tax payments, which may see companies hoard cash into the end of July.
The PBOC’s rhetoric is already shifting.
The central bank comments whenever it refrains from conducting open-market operations, or OMOs, and Monday’s statement referred to a “moderate” level of liquidity in the banking system, a change from the previous 11 trading days when it was described as “relatively high.” Policy makers inject funds to maintain stability in the financial system and to relieve pressure on economic growth as they push on with a much-publicized deleveraging campaign.
“Pressure for liquidity to tighten is building, and the money market rates have reached a floor,” said David Qu, a markets economist in Shanghai at Australia & New Zealand Banking Group Ltd. The PBOC is likely to roll over the medium-term lending facility funds due this week as a lot of cash has already been drained, he said. “In the future, long-term bond yields will continue to climb as the deleveraging drive continues.”
China Merchants Securities Co. goes a step further, with analysts led by Chief Bond Analyst Xu Hanfei predicting a resumption of OMOs as well. The authorities “won’t be stingy” when it comes to injecting funds should China’s economy start to slow in the third quarter, said Pan Jie, chief fixed-income analyst at Orient Securities Co.
It would take a swift about-turn for these scenarios to eventuate, though.
Right now, money-market rates reflect a system still pretty flush with liquidity. While China’s benchmark seven-day repurchase rate edged higher on Monday, it fell the most last week since May to a 12-week low. Still, yields are creeping higher, with rates on 10-year government bonds nearing their highest level in three weeks.
The PBOC hasn’t conducted any OMOs in the past 12 days, and no net funds have been added since June 20. But the central bank doesn’t want liquidity to be too tight because it could hit economic growth and financial stability, says Yulia Wan, a banking analyst at Moody’s Investors Service in Shanghai.
“Policy makers will use a combination of tools to maintain neutral and slightly tight liquidity conditions for the rest of this year,” she said.
— With assistance by Tian Chen, and Yuling Yang