Month-end liquidity squeeze sparks short-term interest rate surge
1 trillion yuan extra government bond issuance amid economic uncertainty
Financial institutions mulling 4Q benchmark rate cuts
On the 31st, China’s short-term interest rate soared to a record high of 50%, increasing concerns about liquidity crunch in the Chinese market. Amid uncertain economic recovery, there are observations that the People’s Bank of China will soon lower the bank’s reserve requirement ratio (RRR).
According to the China Bond Information Network, on the 31st, the overnight repo rate in the Chinese interbank short-term money market soared to 50% in the afternoon. The two-day and three-day repo rates in the interbank short-term money market also surged to 40% and 20%, respectively, and the seven-day and 15-day repo rates also jumped to 12% and 6.2%, respectively.
A market insider told the China First Financial Daily, “Multiple factors such as the concentration of month-end fund settlements, the issuance of bonds for refinancing, and the government’s additional issuance of 1 trillion yuan in government bonds have overlapped,” diagnosing the phenomenon as some investors worried about default risk due to funding difficulties, raising funds at high-interest rates. It was also explained that short-term funds can easily be tightened instantly as banks tend to hesitate to lend money at the end of the month when settlements are concentrated.
China’s state-owned Central (CC) TV also warned that some financial institutions are disrupting the financial market. CCTV said, “Some institutions are overly dependent on borrowing short-term funds for long-term investments to maximize profits, causing their liquidity risks,” and “We need to watch out for those who disrupt the market and create tension in the market.”
CCTV continued, “Raising funds at high-interest rates is a minimal number of institutions, including some non-bank financial institutions and asset managers, and the number and amount of their transactions account for a small proportion of the overall market,” focusing on stabilizing market sentiment. It also emphasized, “Financial institutions should strengthen liquidity management and risk response as liquidity can easily fluctuate due to various end-of-month factors and complex market conditions, and the market is susceptible.”
Citing a People’s Bank official, CCTV reported, “As of 7 pm today, most financial institutions have smoothly completed transactions and settlements,” and “the money market has regained stability.”
Since the end of last month, the People’s Bank has continuously supplied liquidity to the market through reverse repo transactions to stabilize end-of-month liquidity. Last week (October 23-27), the People’s Bank injected 2.824 trillion yuan (approximately $442.8 billion) of liquidity through reverse repo transactions in open market operations.
Although the short-term money market stabilized on the 1st, the market still expects China to lower the bank’s reserve requirement ratio (RRR) and inject liquidity into the market.
The reserve requirement ratio (RRR) is the ratio of reserves that financial institutions must deposit with the central bank to their deposits. Lowering the RRR reduces the amount of money commercial banks have to deposit with the central bank, thereby supplying liquidity to the market.
This is to respond to the surge in bond issuance for refinancing and the additional issuance of 1 trillion yuan in government bonds in China, and the increase in year-end and New Year’s fund demand, as well as to support the recent sluggish economic recovery. According to the National Bureau of Statistics of China, the Manufacturing Purchasing Managers’ Index (PMI), which shows the outlook for China’s manufacturing industry, was recorded at 49.5 in October. It has returned to contraction after a month, falling short of both the previous month and the forecast, adding uncertainty to the future of the Chinese economy.
Ding Shuang, chief economist for Greater China at Standard Chartered Bank, told the First Financial Daily, “The issuance of 1 trillion yuan in government bonds will be completed in the fourth quarter, and the National People’s Congress (NPC) has allowed the issuance of next year’s bond quota allocated to local governments to be advanced to this year,” and “In anticipation of increased year-end liquidity demand, the People’s Bank will lower the bank’s reserve requirement ratio (RRR) by 50bp (1bp=0.01 point) in the fourth quarter to supply more than 1 trillion yuan of liquidity to the market.”
By. Bae In Sun
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