China’s short-term money rates jumped to their highest level in nearly five months on Wednesday on signs that liquidity was tightening again, traders said. A net fund drain by the central bank added to market participants’ nervousness, after similar bouts of tightness in June and July. One of the best indicators of general liquidity in China — the volume-weighted average rate of the benchmark 14-day repo traded in the interbank market — rose 2 basis points to 4.4476 percent, the highest since March 31.
The 7-day repo rate has also risen this week. Wednesday was the third day in a row that the People’s Bank of China (PBOC) refrained from injecting net funds into markets via its open market operations. The PBOC has drained a net 100 billion yuan ($15.01 billion) so far this week through reverse bond repurchase agreements, according to Reuters calculations based on the official data from the central bank.
Some traders said cash conditions have been tight for a week. Seasonal factors including corporate tax payments weighed on liquidity last week, and month-end cash demand started to emerge, adding to the pressure, they said. “The market will continue to monitor how the PBOC operates in the open market operations in the run up to the end of the month,” said a trader at a Chinese bank in Shanghai, adding she expected cash conditions to remain tight in the following week.
Chinese authorities have been keen to force deleveraging this year – especially lending between banks – to reduce speculative activity and risks to the financial system. Interbank assets and liabilities both shrank in the second quarter for the first time since 2010. When liquidity conditions deteriorated in June and July, raising fears of a cash crunch, the PBOC pumped money into the markets to keep rates under control.