Shanghai Interbank Offered Rates (SHIBOR) of all maturities have fallen, prompting the Chinese central bank to refrain from open market operations across a slew of successive days.
On 28 June the overnight SHIBOR fell 6.64 basis points to 2.5596%, the 7 day SHIBOR fell 2.57 basis points to 2.8677%, while the 3-motnh rate fell by 3.11 basis points to 4.5522%
The Open Market Operations Office of the People’s Bank of China announced that liquidity in the banking system remained relatively high following expanded fiscal expenditures in the run up to the month’s end, as well as its own efforts to offset maturing repos.
As a consequence PBOC opted to refrain from open market operations for a fourth consecutive day, leading to a net withdrawal of 50 billion yuan from the system.
PBOC has tightened monetary policy and reduced injections via repos’s since the second half of last year, as well as raised rates on three occasions since the start of 2017, as part of a concerted deleveraging campaign by Chinese financial regulators.
Market observers have expressed concerns, however, that the intensity of the deleveraging campaign could itself trigger crisis by severely constricting liquidity, with worries especially heightened in the lead up to June when seasonal factors lead to a scarcity of funds.
On 25 May PBOC indicated that it was aware of these concerns in relation to end of half capital, and planed to make discretionary use of medium-term lending facilities as well as 28-day repos in June to maintain liquidity stabilise expectations.
According to analysts PBOC’s communications with the market as well as subsequent use of MLF’s and repos helped to satisfy demand for funds in the lead up to mid-year regulatory assessments and assuage market-wide jitters.
Many market observers are now concerned, however, that liquidity will come under further pressure in July as repos and MLF’s continue to mature. Data indicates that 280 billion yuan in repos are set to mature before the start of July, with 709.5 billion yuan in both repos and MLF due during the first third of the month.
CITIC Securities fixed income expert Ming Ming believes that PBOC’s suspension of open market operations should not be interpreted as presaging further tightening of liquidity, but is simply a “customary operation” required at certain times and that funds will continue to remain stable in the near-term.