China's central bank has barely funded money markets for two days in a row, sending a signal that its largesse to banks during the 19th Communist Party Congress was a one-off and develeraging the economy remains core policy. Interbank yuan rates have risen to their highest levels in more than two weeks as the People's Bank of China (PBOC) refrained from injecting funds into the market on Wednesday and injected minimally on Thursday, pausing after six straight trading days in which it pumped cash into the financial system.
The surge in funding costs come just days after the all-important Communist Party Congress, a once-in-five-years event during which the authorities pull out the stops to ensure stability. The PBOC injected a net 840 billion yuan ($126.70 billion) into the money markets over October 17 to October 24, covering the duration of the congress from October 18 to October 24.
This largesse was quite at odds with the broad policy this year of keeping a tight rein on cash supply to reduce the economy's heavy reliance on debt. "The central bank's monetary policy stance is never something that could be adjusted at high frequency," said David Qu, markets economist at ANZ in Shanghai, suggesting the huge amounts of cash supply in the six-day period was not a sign of monetary policy easing.
The People's Bank of China (PBOC) said in its last quarterly monetary policy report that it would keep liquidity basically stable by "cutting the peaks to fill in the valley". Market watchers believe that the central bank is likely to stick with that pledge for the rest of this year.
The PBOC has injected a net 620 billion yuan through reverse bond repurchase agreements so far in October, but has drained a net 215 billion yuan this year. Traders said the massive injections in October were in part to offset the impact of outflows owing to around 700 billion yuan in corporate tax payments. It cancelled out the repos maturing on Wednesday and made a puny net injection of 20 billion yuan on Thursday through open market operations.
"Once the central bank stops providing cash, that probably means a kick-off of fund tightening," Qu Qing, an analyst at Huachuang Securities said. The volume-weighted average rate of the benchmark seven-day repo, considered the best indicator of general liquidity, closed at 2.9286 percent on Wednesday, the highest level since October10, up more than 14 basis points from the previous close.
The seven-day repo rate climbed further on Thursday and was traded at 2.9348 percent at midday. The 14-day repo rate was trading at 4.2652 percent as of midday on Thursday, around 10 basis points higher than the previous close. Some traders didn't see a close connection between the party congress and the PBOC's cash injections.