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China's central bank injects $20bn into banking system

Jan 05 2016 13:19

Jiaxing - In a move to comfort investors after Monday's stock rout, China’s central bank conducted the biggest reverse-repurchase operation since September, adding funds to the financial system after money-market rates surged and equities slumped.

The People’s Bank of China offered 130 billion yuan ($19.9bn) of seven-day reverse repos on Tuesday at an interest rate of 2.25%. The monetary authority suspended the operations in the last auction window on December 31, ending a six-month run of cash injections that helped drive borrowing costs lower in an economy estimated to grow at the slowest pace in more than two decades.

The overnight repurchase rate, a gauge of interbank funding availability, fell one basis point to 2.01% as of 16:30 in Shanghai, according to a weighted average from the National Interbank Funding Centre. It climbed to 2.12% on December 31, the highest since April.

“Liquidity is tight in the market and the PBOC has to react to that,” said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA. “Capital outflows may keep liquidity tight and there is likely to be more easing from the PBOC.”

Easing, stocks

The monetary authority cut the reserve-requirement ratio for major lenders by 250 basis points in 2015 to 17.5%, and is forecast to further lower it to 15% by the end of this year, according to a survey last month.

A central bank research bureau economist last week dampened speculation reserve requirements will be eased, saying that any adjustments should avoid causing too much volatility to short-term rates.

Stock trading in China was halted on the first trading day of the year after a 7% selloff in the CSI 300 Index triggered circuit breakers. The gauge closed 0.3% higher on Tuesday.

“By offering such a big amount of reverse repos, the PBOC is also trying to comfort the market following the equities slump yesterday,” said Liu Dongliang, a senior analyst at China Merchants Bank Co.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was little changed at 2.34%, data compiled by Bloomberg show.

Sovereign bonds declined, with the 10-year yield rising two basis points to 2.91%, according to National Interbank Funding Centre prices.

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