Chinese Money Market Rates Rise as Govt Bond Auction Fails and PBOC Remains Passive

China’s short-term funding costs jumped on Friday as the central bank kept liquidity relatively tight and the Chinese government failed to sell all its bonds at an auction.


The benchmark weighted-average seven-day bond repurchase rate, a key gauge of short-term liquidity, jumped 48 bps to 6.87% on Friday (its highest since Jan 2012), up from less than 3% a month ago. The overnight repo rate rose 8 bps to 7.02%, while the 14-day rate surged 44 bps to 7.65%.


In parallel, the finance ministry sold only CNY9.5B of the CNY15B in government debt on offer, the first time in nearly two years that the ministry has not reached its target bond sale.


PBOC has refused to inject cash into the market on a large scale, even as money rates rose steadily in recent weeks. The fact is that money supply (M2) still increased at steady rate in May at 15.8% YoY while the official target is only 13%. Moreover, housing prices keep on rising and should reach in May their highest level since last summer.


This tightness in China’s financial system is the indication that the government appears ready to tolerate slower growth to control several risks (overall accumulation of debt as well as the lightly regulated “shadow banking” institutions) and to favorize the consumer welfare (less inflation and higher purchasing power, easier access to property market).


Finally, with the quarter-end approaching, when banks traditionally try to increase deposit totals and diminish lending, liquidity could remain tight at least until the beginning of Q3. It means that Q2 GDP should slow and could be below 7.5%. On the positive side, in Q3, PBOC will have more room (slowdown of M2, CPI, PPI,  measures to curb housing prices) to reverse the liquidity squeeze by pumping more short-term cash into the market.