Date
21 July 2017
China's Central bank has signaled its intention to gradually pierce a bond market bubble that has grown on heavy borrowing of short-term money.  Photo: WSJ
China's Central bank has signaled its intention to gradually pierce a bond market bubble that has grown on heavy borrowing of short-term money. Photo: WSJ

China’s central bank shifts strategy to 14-day reverse repos

China’s central bank has made a subtle change to the way it supplies the financial system with cash.

Thw Wall Street Journal is reporting that the move is seen as an attempt to cool investment in assets such as bonds, which have ballooned on an influx of cheap, short-term money.

For the past two weeks, the People’s Bank of China has been decreasing the amount of the cheap seven-day loans — known as reverse repurchase agreements, or repos — that it makes to commercial banks in its daily money-market operations.

On Wednesday, it started supplementing those seven-day repos with pricier 14-day repos, a move that decreases the amount of cheap, short-term credit available in the financial system and guides demand toward longer-term borrowing.

Such short-term loans are typically used for the daily cash needs of financial institutions.

However, in recent years, banks have increasingly channeled some of that money into investments and to investors, who borrowed it at cheap rates to plow into assets such as bonds.

That has pushed up bond prices and depressed yields, which move in the opposite direction.

Analysts warn that such borrowing has significantly raised the amount of leverage in China’s US$8.5 trillion domestic bond market: estimates place the amount of borrowed money at anywhere from 30 percent of principle to double or even triple.

That leverage is partly responsible for fueling a rally that took yields from a high of 4.62 percent in January 2014 to 2.61 percent this month, analysts say.

Wednesday’s subtle shift likely signals the government is trying to deflate that rally, market watchers say. Short-term funding costs rose sharply and Chinese sovereign bond yields climbed as well.

This “is certainly a sign that the central bank wants to guide more money into the real economy and discourage people who have used shorter-term funding to bet on a further bond-market rally, “ said Wang Jing, deputy general manager at the fixed-income department of China Securities Credit Investment Co., a financial-services firm in Shenzhen.

The weighted average of the seven-day repo rate—a measure of how much banks in China charge each other for short-term borrowing—rose to 2.53% Wednesday, up from 2.40% Tuesday and marking its highest level since July 8, 2015.

– Contact us at english@hkej.com

RA

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