Chinese Central Bank Injects Liquidity in Response to Rising Bond Yields

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The People’s Bank of China (PBOC) stepped up liquidity injections last week in response to a rise in interest rates across all maturities.

Data from Wind indicates that on 14 November, the DR007 interbank pledged seven-day repo rate, the big state-owned bank one-year interbank certificate of deposit rate and the 10-year government bond yield all posted gains compared to the preceding trading session, rising 2 basis points to 1.84%, 5 basis points to 2.28% and 10 basis points to 2.84% respectively.

In China, this trio of rates are considered to be key indicators of market interest rates at the short, mid and long-term tenors. The rates for PBOC’ s medium-term lending facilities (MLF) are considered a key driver of medium-term market rates, exerting an especially strong influence on government bonds and interbank certificates of deposits.

On 15 and 16 November these three key rates continued to fluctuate upwards, as PBOC made haste to inject liquidity in order to stymie gains in interest rates and declines in bond prices.

On 14 November PBOC made a net injection of 3 billion yuan in liquidity, followed by a net injection of 20 billion yuan in liquidity on 15 November, and a net injection of 63 billion yuan on 16 November.

On 17 November, PBOC made a net injection of 123 billion yuan in liquidity via 132 billion yuan in reverse repo operations, as compared to 9 billion yuan in maturing reverse repos. Tis amount marked the largest net injection by PBOC in three weeks.

State-owned media reports that this spate of liquidity injections helped to stabilise the market and reduce interest rates. On 17 November the DR007 hovered at around 1.86%, for a decline of 15 basis points compared to the previous day, while the yield for 10 year government-bonds fell 3.25 basis points.

The rate for one-year interbank certificates of deposit issued by big state-owned banks continued to ride high however, hovering at the 2.5% level. This rate remains below the rate for the medium-term lending facilities (MLF) used by PBOC for its open market operations.

Domestic analysts say that the liquidity injections do not mark a shift in PBOC’s overall monetary policy trends, particularly as outlined by the Q3 Monetary Policy Execution Report.

“Under the constraints of internal inflation and external balancing, further intensification of loosened monetary policy is not that necessary,” said Zhang Jiqiang (张继强), chief fixed-income analyst with Huatai Securities.

“In future the focus will be more on effectively implementing current policy, such as policy financial tools, and the raft of support for real estate enterprises.

“In the fourth quarter there is basically no possibility of interest rate reductions, and there is some small room for reductions in the reserve requirement ratio.”