The People’s Bank of China took the unsurprising step of suspending Tuesday’s open market operations amid some of the tightest liquidity conditions seen so far this year.
Just CNY18 billion in outstanding PBOC paper comes due this week, and that won’t be enough to counter the impact of tax payments as well as another 11 initial public offerings, some traders warn.
In the interbank market, money rates rose in choppy trading Monday, with the overnight repo averaging 3.3650%, higher than last Friday’s 3.2894%. The seven-day repo rate traded at an average 3.8472%, up from Friday’s 3.7561%.
The seven-day – a key gauge of market liquidity conditions – remains well below the record 25% seen just over a year ago, but in recent days has routinely pierced through the 4% level which is thought to mark the limit of the PBOC’s comfort zone.
Tuesday’s operation is the first of two regular PBOC interventions in the market each week. Some traders, particularly with smaller banks, had been expecting the bank to offer reverse repos to institutions for the first time since January in response to signs of tightening liquidity conditions in the market.
Bigger banks, which have fewer problems in the current climate, don’t believe the PBOC wants to take that step in case it is misinterpreted as a policy easing move.
Initial public offerings this week may freeze an estimated CNY700 billion to CNY1 trillion in funding, according to China International Capital Corp., a government-owned investment bank. Tax payments this week could see another CNY200 billion flowing out.
In response, the PBOC will be auctioning CNY50 billion in three-month Ministry of Finance deposits into the system on Thursday, the first time since January that it will make two treasury deposit auctions in a month.
The PBOC has added funds to the interbank market via its open market operations for 10 weeks in a row, injecting a total of CNY510 billion in funds. In all cases, the PBOC simply allowed outstanding paper to mature and flow back into the system. It hasn’t transacted reverse repos since January 28, when it added short-term funding to meet demands associated with the Chinese New Year holiday.
Tightening conditions led China Development Bank to say on Monday that it will halve the size of planned bond sales, highlighting the lender’s problems in finding buyers in the market this week.
The development bank, the biggest of the government’s policy lenders, received CNY1 trillion from the PBOC in the second quarter, local media is reporting this week, making it the first recipient of funding under the bank’s new Pledged Supplementary Lending facility.
The facility is designed to target medium-term rates in the market to help lower financing costs for economic activity, though traders are complaining that the PBOC’s cloak-and-dagger approach to liquidity provision is making it harder to plan borrowing requirements.