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Signs that money supply will loosen
Source: Bloomberg News |
September 27, 2011, Tuesday
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Print Edition
Print Edition
CHINA'S cash shortage will ease in the fourth quarter as the risk of a global economic slump prompts the central bank to halt monetary tightening, according to a survey of bond analysts.
The seven-day repurchase rate, the annualized interest rate banks say they charge each other for one-week loans, will average 3.8 percent, based on the median of 12 estimates in a Bloomberg survey. This quarter's level of 4.4 percent is the highest in data going back to the start of 2004. Similar rates for dollars, euros and yen have averaged 0.18 percent, 1.21 percent and 0.13 percent respectively in the same period.
"The central bank will probably stand by and watch in the fourth quarter," said Shi Lei, head of fixed-income research at Ping An Securities. "With such big uncertainties in the global economy and increasing signs of a domestic slowdown, the likelihood of a rise in interest rates or reserve-requirement ratios is very low."
Growth forecasts cut
Swap traders pared bets last week on the possibility the central bank will raise rates in the next 12 months as the International Monetary Fund cut economic growth forecasts for China and the world. Shi said more available cash in the banking system will spur a rebound in government bonds in the coming quarter, with five and seven-year debt leading gains.
The People's Bank of China did not raise lenders' reserve-requirement ratios this quarter, after nine increases in the eight months to June, and the last of five interest-rate rises in the past year took effect on July 7. The central bank began broadening the scope of reserve ratios to include margin deposits from September 5, a measure being phased in over six months.
The seven-day repurchase rate jumped 85 basis points last week to 4.17 percent in Shanghai after sliding 88 basis points in the previous two weeks on speculation lenders will hoard cash to meet end-of-quarter capital requirements and holiday demand for funds. China's financial markets will be closed next week for the National Day break.
Chen Jianheng, a bond analyst at China International Capital, said: "The extra money banks have to set aside because of the widening of the reserves base may amount to more than 200 billion yuan (US$30 billion) in both October and November. Even though another reserve-ratio rise is unlikely in the fourth quarter, we will probably not see a big rebound in cash supply."
M2, the broadest measure of money supply used in forecasts of inflation, expanded 13.5 percent from August last year, the smallest advance since October 2004, according to central bank data. Growth averaged 21 percent over the past three years.
China's central bank has kept pumping capital into the interbank market in each of the past 10 weeks, with maturing bonds and repurchase agreements exceeding those issued, according to data compiled by Bloomberg News. Policymakers injected 399 billion yuan of cash during this period.
Wang Mingfeng, a bond analyst at CITIC Securities, said: "The central bank's moves in open-market operations show it may want to take banks out of the cash deadlock. As inflation starts to trend downward, monetary policy should not be so tight."
Inflation in China slowed to 6.2 percent in August from a three-year high of 6.5 percent the previous month, according to the statistics bureau. Wang said consumer price gains may moderate to about 5 percent in the fourth quarter because the slowing economy will crimp domestic demand.
China's two-year interest-rate swaps, which exchange the central bank's one-year deposit rate for a fixed payment, dropped seven basis points to 3.47 percent in Shanghai yesterday morning, the biggest drop in four months, and the contracts for the first time since May 2009 reflect expectations borrowing costs will be cut within a year.
The floating part of the contract is reset after one year and a rate of 3.5 percent would show traders expect no change in the official savings rate, while a 3.625 percent level would indicate one increase of 25 basis points.
China International Capital's Chen said the country may raise interest rates one more time before the end of this year, though reserve--requirement ratios are unlikely to be increased.
Reserve ratio hopes
Reserve ratios for smaller lenders may be lowered in November or December, according to CITIC Securities' Wang. The ratio for major banks is at a record 21.5 percent, while that for smaller ones is 19.5 percent, according to data compiled by Bloomberg News.
China's gross domestic product will rise 9.5 percent this year, less than a June estimate of 9.6 percent, the IMF said, citing policy tightening and moderating external demand. The fund lowered its 2012 growth forecast for the nation to 9 percent from 9.5 percent.
The seven-day repurchase rate, the annualized interest rate banks say they charge each other for one-week loans, will average 3.8 percent, based on the median of 12 estimates in a Bloomberg survey. This quarter's level of 4.4 percent is the highest in data going back to the start of 2004. Similar rates for dollars, euros and yen have averaged 0.18 percent, 1.21 percent and 0.13 percent respectively in the same period.
"The central bank will probably stand by and watch in the fourth quarter," said Shi Lei, head of fixed-income research at Ping An Securities. "With such big uncertainties in the global economy and increasing signs of a domestic slowdown, the likelihood of a rise in interest rates or reserve-requirement ratios is very low."
Growth forecasts cut
Swap traders pared bets last week on the possibility the central bank will raise rates in the next 12 months as the International Monetary Fund cut economic growth forecasts for China and the world. Shi said more available cash in the banking system will spur a rebound in government bonds in the coming quarter, with five and seven-year debt leading gains.
The People's Bank of China did not raise lenders' reserve-requirement ratios this quarter, after nine increases in the eight months to June, and the last of five interest-rate rises in the past year took effect on July 7. The central bank began broadening the scope of reserve ratios to include margin deposits from September 5, a measure being phased in over six months.
The seven-day repurchase rate jumped 85 basis points last week to 4.17 percent in Shanghai after sliding 88 basis points in the previous two weeks on speculation lenders will hoard cash to meet end-of-quarter capital requirements and holiday demand for funds. China's financial markets will be closed next week for the National Day break.
Chen Jianheng, a bond analyst at China International Capital, said: "The extra money banks have to set aside because of the widening of the reserves base may amount to more than 200 billion yuan (US$30 billion) in both October and November. Even though another reserve-ratio rise is unlikely in the fourth quarter, we will probably not see a big rebound in cash supply."
M2, the broadest measure of money supply used in forecasts of inflation, expanded 13.5 percent from August last year, the smallest advance since October 2004, according to central bank data. Growth averaged 21 percent over the past three years.
China's central bank has kept pumping capital into the interbank market in each of the past 10 weeks, with maturing bonds and repurchase agreements exceeding those issued, according to data compiled by Bloomberg News. Policymakers injected 399 billion yuan of cash during this period.
Wang Mingfeng, a bond analyst at CITIC Securities, said: "The central bank's moves in open-market operations show it may want to take banks out of the cash deadlock. As inflation starts to trend downward, monetary policy should not be so tight."
Inflation in China slowed to 6.2 percent in August from a three-year high of 6.5 percent the previous month, according to the statistics bureau. Wang said consumer price gains may moderate to about 5 percent in the fourth quarter because the slowing economy will crimp domestic demand.
China's two-year interest-rate swaps, which exchange the central bank's one-year deposit rate for a fixed payment, dropped seven basis points to 3.47 percent in Shanghai yesterday morning, the biggest drop in four months, and the contracts for the first time since May 2009 reflect expectations borrowing costs will be cut within a year.
The floating part of the contract is reset after one year and a rate of 3.5 percent would show traders expect no change in the official savings rate, while a 3.625 percent level would indicate one increase of 25 basis points.
China International Capital's Chen said the country may raise interest rates one more time before the end of this year, though reserve--requirement ratios are unlikely to be increased.
Reserve ratio hopes
Reserve ratios for smaller lenders may be lowered in November or December, according to CITIC Securities' Wang. The ratio for major banks is at a record 21.5 percent, while that for smaller ones is 19.5 percent, according to data compiled by Bloomberg News.
China's gross domestic product will rise 9.5 percent this year, less than a June estimate of 9.6 percent, the IMF said, citing policy tightening and moderating external demand. The fund lowered its 2012 growth forecast for the nation to 9 percent from 9.5 percent.
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