Tuesday, August 21, 2012

PBoC managing China's rising interest rates

Interest rates in China have been on the rise. The 7-day repo swap rates have been increasing across all tenors. These swaps exchange the 7-day repo rate (reset weekly) for a fixed rate over a longer period (such as 2 years) - thus providing a window into the market's long-term expectations of repo rates. The increase is an indication of tightening liquidity conditions in the interbank market.

2-year fixed for floating  (7-day repo) swap rate (Bloomberg)

China's central bank has been trying to add more liquidity to the money markets in order to stabilize rates (without adjusting the bank reserve ratio).
WSJ: - The People's Bank of China injected 220 billion yuan ($34.7 billion) into the money market Tuesday via reverse repurchase agreements offered in its regular open-market operation, continuing efforts to ease monetary conditions and bolster a slowing economy.
So far these liquidity injections have not worked, as demand for short-term money remains high and rates continue to rise.
Reuters: - China's key money rates ticked higher on Tuesday, with the central bank's largest fund injection since early July failing to ease conditions amid elevated month-end cash demand and corporate tax payments. The People's Bank of China injected 220 billion yuan into the banking system via reverse repos on Tuesday, against a net 87 billion yuan scheduled to be drained this week due to maturing bills, repos, and reverse repos.

That guarantees a net injection of at least 133 billion yuan for the week not including additional reverse repos likely to be auctioned on Thursday. Such an injection would be the largest since the week of July 2-6.

"The market demand is quite large. Monday's demand was really heavy. The central bank's action today basically just satisfied current demand, but didn't in any way exceed it in a way that would bring rates down," said a trader at a city commercial bank in Shanghai.
The PBoC has been cautious about flooding the market with liquidity due to risks it could reignite inflationary pressures. Yet left unchecked, rising interest rates could threaten growth, given that the GDP is already growing at the lowest rate since 2009. This will require a delicate balance for the central bank going forward.

China GDP YoY (Bloomberg)

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