Another day, another high in Chinese money market rates:
That’ll be FT Alphaville’s favourite Chinese interbank benchmark, the seven-day fixed repo rate, posting a record one-day rise of 242bps on Tuesday. Note the 2007 parallel. One-week Shibor isn’t looking too hot either. Above all, this crunch keeps coming despite attempts to inject liquidity and keep the plates spinning.
All in all, this is looking less like a ‘temporary’ cash access problem for banks ahead of the New Year holiday, more like something gone very wrong in the way China’s central bank prefers quantitative tools to supply and withdraw liquidity, such as open market operations or making banks hold more deposits, opposed to normal interest rates. To remind — simply hiking rates could encourage even more capital inflows into China, which makes maintaining the renminbi’s dollar peg harder.
Problem is, what if all those other tools contradict each other too?
It might pay to look at the rate that banks are willing to pay to deposit government cash — which has risen to 5.9 per cent (a high last seen in 2006) as liquidity available elsewhere dries up. Clearly something’s up with selling yuan-denominated paper to banks in general, following the cancellation of sales for a second week.
These points made by a friendly broker might get to the nub of it:
The PBOC sent two signals by the latest RRR hike. The most important is that the hike was a replacement of open market bill sales instead of a monetary policy tightening. On top of that, the PBOC hopes to tell the market that banks have lent too much at the the start of this year…
Changes in how the PBOC manages the massive liquidity in its financial system and capital inflows chasing yuan appreciation mean that they are increasingly making RRR its weapon of choice for fund drains.
As bill sales in the open market have become either symbolic or have been occasionally suspended since November, overall liquidity drains have not increased much despite the RRR hike. The PBOC is reluctant to let its bill auction yields be hijacked by higher secondary market yields so that it is unable to sell large quantities of bills.
This last point is pretty crucial, in fact. It’s a very bad idea for those yuan-denominated yields to rise too much higher than the yield that China gets from the foreign securities it buys in order to sterilise FX buying directed at the dollar peg — although the PBoC may have to accept high yields eventually.
In the meantime, we’re getting a distinct sense that China can’t keep spinning all these plates when it comes to controlling liquidity.
First there were interest rate hikes, RRR hikes, and OMOs. Then the interest rate hikes became impolitic. Then there were RRR hikes and OMOs — and then, OMOs had to go too.
Related links:
Here come the hot inflows into China - FT Alphaville
What the China risk is – FT Alphaville
China. Rock. Inflation. Hard Place - FT Alphaville