Liquidity Undergoes Structural Tightening in Lead up to 2018

Liquidity has become scarce and wholesale borrowing costs have risen across the board in the run up to the end of 2017.

The latest figures from FC Financial Big Data indicates that the weighted average rates for overnight, 14-day and 1-month pledged repos all staged significant gains on 27 December, rising 9 bps, 29 bps and 7 bps respectively compared to the previous trading session to reach 2.66%, 5.23% and 5.42%.

On the same day the overnight, 7 day, 14 day and 1 month Shanghai Interbank Offered Rates all rose across the board to 2.67%, 2.91%, 3.96% and 4.93% respectively, with the key 1-month SHIBOR rate’s close approach of the 5% threshold reflecting sharp tightening in the availability of funds.

Tan Han (覃汉), chief fixed-income analyst for Guotai Jun’an, said that while the market feels that funds have become extremely tight in the lead up to 2018, the central bank has taken a more sanguine attitude, as evidenced by four consecutive trading sessions devoid of open market operations.

On 27 December the People’s Bank of China refrained from taking any action to compensate for the 40 billion yuan net withdrawal of funds caused by the maturation of its repo agreements.

According to Tan PBOC’s inaction and refusal to inject more liquidity into the market just prior to the end of the years sends a a strong signal with respect to tightened control of the money supply in 2018.

Tan further points out that interbank certificate of deposit rates have recently posted strong rises, significantly exacerbating structural tightness on the money market.

Data from the China Foreign Exchange Trading System and National Interbank Funding Center (全国银行间同业拆借中心) indicates that on 26 December AAA-rated 1-month interbank CD quotes reached a historic high of 5.2% – 5.5%, while 3-month quotes also hit an unprecedented height of 5 – 5.3%.

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