The People’s Bank of China cut the volume of funds it removed from the interbank market for the third week, even as interbank market rates continue to bump along low levels not seen in well over a year.
The bank’s CNY100 billion in 28-day repos transacted Thursday brought the week’s net drain to CNY40 billion, down from CNY70 billion last week, CNY108 billion the week before that and the massive CNY450 billion taken out the week after the Chinese New Year holiday.
Thursday’s operation is the second in a row that the PBOC has relied solely on 28-day instruments to remove funds, slightly extending the length of time that liquidity is locked up from its earlier reliance on 14-day maturities.
Dropping 14-day repos has failed to stir jitters about tightening in the market. The seven-day repo traded at 2.2250% on average Wednesday while the overnight repo rate fell to 1.8597%, in sight of Tuesday’s 1.8777%.
Money market rates are at levels not seen since before last June’s liquidity crunch, even as concerns rise globally about financial risk in China and analysts debate whether the country is facing a “Bear Stearns moment” or a “Lehman Brothers moment”.
There’s no doubt that domestic financial institutions are getting more nervous; the low rates reflect slowing credit activity as the economy weakens and banks respond to government calls to clean up their act.
Despite flush market liquidity conditions, PBOC data released Monday indicate that credit activity cooled in February after January’s record CNY2.58 trillion. Banks loaned CNY644.5 billion last month, down on the expected CNY726.1 billion and January’s CNY1.32 trillion.
Total social financing, which captures at least a chunk of shadow banking activity, shrank to CNY939 billion in February from January’s massive amount.
The fact that the PBOC isn’t more aggressively soaking up money from the system indicates that the authorities are reassured that the financial system is cushioned against risk.
Yield movements suggest the default of Chaori Solar Energy last Friday hasn’t had much of an impact on the bond market. But some traders are concerned that more investment products will be allowed to fail and that the cumulative impact of these will shake the system.
The China Securities Journal, which is thought to occasionally reflect official opinion, sought to dampen market talk about an imminent reserve cut in an editorial Thursday. The newspaper said such a move would be counterproductive, and that open market operations are a more than adequate channel for meeting the market’s monetary needs.