China’s bonds advanced along with the yuan and stocks after the central bank added 500 billion yuan ($81.4 billion) to the financial system.
The People’s Bank of China yesterday started providing the nation’s five biggest lenders with 100 billion yuan each through standing lending facilities with three-month tenors, according to a government official familiar with the matter. SLFs were used in January to meet increased demand for funds ahead of the Lunar New Year holiday, and before that from June 2013 to ease a record cash crunch. The finance ministry sold 10-year sovereign bonds today at the lowest yield since June.
The yield on five-year government notes fell the most in
three months, the yuan gained for the first time in five days and the Hang Seng China Enterprise Index of shares recorded the biggest jump in two weeks. One-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, dropped as much as seven basis points to a three-month low of 3.46 percent in Shanghai, data compiled by Bloomberg show.
“The SLF will iron out the short-term bumps in liquidity,” Hao Hong, a Hong Kong-based strategist at Bocom International Holdings Co., said in a phone interview. “There is a need for liquidity injections because there are IPOs coming up that can tie up 800 billion to 1 trillion yuan at a time. Plus you have cash demand for the Golden Week holiday and quarter-end demand from banks to meet regulatory requirements.”
After being frozen for a year, the pipeline for initial public offerings of shares in China was reopened late last year. Stocks making their debut in 2014 have surged an average 43 percent on their first day, fueling demand for new listings. The securities regulator on Sept. 15 approved 11 more offerings and the Golden Week holiday starts Oct. 1.
Yield Drops
The yield on government debt due April 2019 fell four basis points, or 0.04 percentage point, to 4 percent as of 4:30 p.m. in Shanghai, data from the National Interbank Funding Center show. That’s the biggest decline since June 10. The Ministry of Finance sold 28.05 billion yuan of 10-year bonds at 4.13 percent today, compared with the median estimate of 4.26 percent in a Bloomberg survey.The seven-day repo rate, a gauge of funding availability in the interbank market, rose five basis points to 3.38 percent, according to a weighted average compiled by the National Interbank Funding Center.
Reserve Requirements
Goldman Sachs Group Inc., Bank of America Corp. and Barclays Plc estimated the amount of the latest SLF is roughly the same as a 50 basis point cut in the reserve-requirement ratio in research notes. Reserve ratios for Chinese banks were last lowered nationwide in May 2012, though there have been reductions for certain lenders since.Yesterday’s move reduces the chance of the central bank cutting the ratios and interest rates, which are viewed as more aggressive stimulus, according to analysts at Bank of America and Goldman. Instead, policy makers may introduce other measures, such as accelerating government spending and lowering mortgage rates to stabilize growth, according to the analysts.
The HSCEI (HSCEI) of Chinese shares in Hong Kong climbed 1.6 percent as banks rallied. Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, and China Construction Bank Corp. rose more than 1.9 percent each. The Shanghai Composite Index (SHCOMP) closed 0.5 percent higher, while the yuan advanced 0.1 percent to 6.1401 per dollar in Shanghai. The offshore currency rose 0.14 percent, the most since Aug. 8, to 6.1527 in Hong Kong.
Liquidity Impact
Although the latest cash injection is bigger than the SLF conducted in January, the immediate liquidity impact may not be as big as markets had estimated, considering scheduled IPOs and holidays, said Yang Chen, a Hong Kong-based rates strategist at Bank of America. “Having said that, the PBOC choosing to do three-month instead of one-month suggests that the purpose of the SLF is more than just smoothing seasonal liquidity.”Market talk is circulating that the SLF rate was very low, according to a Guosen Securities Co. report. “Obviously the central bank’s intention was to lower financing costs,” economists led by Zhong Zhengsheng wrote.
Foreign direct investment in China sank to a four-year low in August, the government reported yesterday. Industrial output rose at the slowest pace since 2008 while investment and retail sales grew less than economists estimated, according to data released over the weekend.
Barclays Plc and Royal Bank of Scotland Group Plc lowered their forecasts for China’s 2014 gross domestic product growth to 7.2 percent, while Nomura Holdings Inc. cut it to 7.4 percent. That compares with a government target of 7.5 percent.
‘Pessimistic Tone’
A pessimistic tone that China may miss its full-year economic growth target and the government needs to adopt strong stimulus measures such as an interest-rate cut is getting louder, according to a commentary by the official Xinhua news agency published yesterday. These noises emerge repeatedly because people are not seeing the new normal in China’s economy and showing distrust in the nation’s reforms, it added.“The targeted measures are a better way of getting the economic outcome they desire without the risk of reversing the progress they have made in cooling off the housing market and bringing the shadow banking system under control,” said Tim Condon, Singapore-based head of Asian research at ING Groep NV. “The weak data was the cause of additional easing.”
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