Inflation holds off reserve requirement cut
Source: Bloomberg News |
August 24, 2012, Friday
|
Print Edition
Print Edition
BILLS issued by the People's Bank of China are sliding at the fastest pace in a year as inflation concerns deter policymakers from relaxing lenders' reserve requirements to address a cash squeeze.
The yield on one-year central bank paper rose 20 basis points since July to 2.86 percent, headed for the biggest monthly increase since August 2011, Chinabond data show. The rate on similar-maturity United States Treasuries increased 1 basis point to 0.17 percent. Chinese lenders paid a 3.52 percent yield when the government auctioned 40 billion yuan (US$6.3 billion) of three-month deposits yesterday, compared with 3.5 percent at the last sale on July 24.
Banks are scrambling for funds as the slowest economic growth in three years curbs capital inflows. While the monetary authority is injecting cash using seven- and 14-day reverse repurchase agreements, more permanent solutions are being put on hold as commodity prices surge and property values climb.
"Liquidity remains tight in the absence of a reserve requirement cut," said Weisheng He, a fixed-income analyst at Citigroup Inc in Shanghai. "Even the four biggest banks need to borrow in the market from time to time. Reverse repos are very short-term and not everyone can access the window, but the PBOC is worried about increases in property and food prices."
Central bank Governor Zhou Xiaochuan said on Wednesday that use of reserve-requirement ratios and interest rates can't be ruled out. The Standard & Poor's GSCI index of 24 raw materials has jumped 22 percent since reaching this year's low on June 21 and new-home prices rose in July in 49 of 70 cities tracked by the government, the highest proportion in 14 months.
The monetary authority sold 145 billion yuan of seven- and 14-day reverse repos yesterday, said a trader. The contracts involve short-term purchases of securities from banks and were used to pour a record 220 billion yuan into the financial system on Tuesday.
Auctions were held in each of the last eight weeks and the PBOC's money-market operations injected a net 401 billion yuan in that time, according to data compiled by Bloomberg News. The last reduction in reserve-requirement ratios was in May and released 400 billion yuan into the financial system, according to estimates made at the time by Bank of America Corp and HSBC Holdings Plc.
The three-month Shanghai interbank offered rate, or Shibor, a measure of interbank funding availability, rose for a eighth day yesterday, boosting it to 3.6543 percent in the longest run of increases since June 2011, according to a daily fixing published by the National Interbank Funding Center. The 10-year government bond yield increased nine basis points this month to 3.38 percent, Bloomberg News data show.
"The liquidity squeeze could still continue for a while if the PBOC does not get more aggressive in its easing," said Frances Cheung, a rates strategist at Credit Agricole CIB in Hong Kong. She predicts reserve-requirement ratios will be cut by up to 100 basis points more this year, in line with the median forecast of 19 economists surveyed this month by Bloomberg News.
Consumer prices increased 1.8 percent from a year earlier in July, the least in 30 months, and the central bank said on August 2 that inflation may gather pace from September.
"A reserve-requirement-ratio cut would stir public sentiment on the outlook for property prices and risk stoking inflation," Helen Qiao, chief China economist at Morgan Stanley Asia Ltd, said in Taipei. Money-market operations are likely to be the favored tool to add liquidity until after the five-day National Day holiday in the first week of October, she said.
The yield on one-year central bank paper rose 20 basis points since July to 2.86 percent, headed for the biggest monthly increase since August 2011, Chinabond data show. The rate on similar-maturity United States Treasuries increased 1 basis point to 0.17 percent. Chinese lenders paid a 3.52 percent yield when the government auctioned 40 billion yuan (US$6.3 billion) of three-month deposits yesterday, compared with 3.5 percent at the last sale on July 24.
Banks are scrambling for funds as the slowest economic growth in three years curbs capital inflows. While the monetary authority is injecting cash using seven- and 14-day reverse repurchase agreements, more permanent solutions are being put on hold as commodity prices surge and property values climb.
"Liquidity remains tight in the absence of a reserve requirement cut," said Weisheng He, a fixed-income analyst at Citigroup Inc in Shanghai. "Even the four biggest banks need to borrow in the market from time to time. Reverse repos are very short-term and not everyone can access the window, but the PBOC is worried about increases in property and food prices."
Central bank Governor Zhou Xiaochuan said on Wednesday that use of reserve-requirement ratios and interest rates can't be ruled out. The Standard & Poor's GSCI index of 24 raw materials has jumped 22 percent since reaching this year's low on June 21 and new-home prices rose in July in 49 of 70 cities tracked by the government, the highest proportion in 14 months.
The monetary authority sold 145 billion yuan of seven- and 14-day reverse repos yesterday, said a trader. The contracts involve short-term purchases of securities from banks and were used to pour a record 220 billion yuan into the financial system on Tuesday.
Auctions were held in each of the last eight weeks and the PBOC's money-market operations injected a net 401 billion yuan in that time, according to data compiled by Bloomberg News. The last reduction in reserve-requirement ratios was in May and released 400 billion yuan into the financial system, according to estimates made at the time by Bank of America Corp and HSBC Holdings Plc.
The three-month Shanghai interbank offered rate, or Shibor, a measure of interbank funding availability, rose for a eighth day yesterday, boosting it to 3.6543 percent in the longest run of increases since June 2011, according to a daily fixing published by the National Interbank Funding Center. The 10-year government bond yield increased nine basis points this month to 3.38 percent, Bloomberg News data show.
"The liquidity squeeze could still continue for a while if the PBOC does not get more aggressive in its easing," said Frances Cheung, a rates strategist at Credit Agricole CIB in Hong Kong. She predicts reserve-requirement ratios will be cut by up to 100 basis points more this year, in line with the median forecast of 19 economists surveyed this month by Bloomberg News.
Consumer prices increased 1.8 percent from a year earlier in July, the least in 30 months, and the central bank said on August 2 that inflation may gather pace from September.
"A reserve-requirement-ratio cut would stir public sentiment on the outlook for property prices and risk stoking inflation," Helen Qiao, chief China economist at Morgan Stanley Asia Ltd, said in Taipei. Money-market operations are likely to be the favored tool to add liquidity until after the five-day National Day holiday in the first week of October, she said.
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