China’s central bank has continued large-scale injections as short-term rates rise and the tax payment period kicks off, assuaging market concerns about liquidity in July.
On 18 July the People’s Bank of China used yield auctions to undertake 200 billion yuan in repo agreements, in order to to offset the maturation of repo agreements and medium-term lending facilities (MLF), as well as government bond payments and the taxation period.
The 200 billion yuan in repo agreements consisted of 130 billion yuan of 7 day contracts and a further 70 billion yuan in 14 day contracts.
This translated into net injections of 170 billion yuan for 18 July, given the maturation of 30 billion yuan in repos on the same date.
On the same date short-term Shanghai Interbank Offered Rates (SHIBOR) continued to rise, with the overnight rate increasing 0.681 basis points to 2.6280% and the seven day rate rising 0.236 basis points to 2.8293%, as rates for longer maturities all fell.
A fixed income research report from Guosen Securities notes that as a result of tax payments, public finance deposits have increased by over 500 billion yuan on average during the month of July over the past four years.
Because of the pressure that tax payments will put on funds towards the end of the month, Guosen expects the central bank to actively increase market injections via open market operations.
The report notes that any volatility in funds will be short-term, with public finance sets set to assume negative growth in August and September.
The central bank has also flagged its determination to maintain liquidity with its repo operations on 11 and 17 July, while the historically low rate of growth in the M2 money supply gives it room to accelerate in order to keep interbank rates low.