SHANGHAI, Oct 14 ― China’s central bank cut the interest rate it pays lenders for 14-day repurchase agreements for the second time in a month, spurring a bond rally on bets the move will lower borrowing costs and help the economy.
The People’s Bank of China sold 20 billion yuan (RM10.7 billion) of the contracts at 3.4 per cent today, according to a statement on its website. That compares with 3.5 per cent in a similar auction on October 9. The monetary authority last cut the rate on September 18 from 3.7 per cent. With the interbank 14-day repo rate around 3.3 per cent, it’s time for the PBOC to lower the yield again, Shenyin Wanguo analysts led by Shanghai-based Chen Kang wrote in a note before the bi-weekly operations today.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell 11 basis points to 3.14 per cent as of 2.11pm in Shanghai, the lowest since February 2013, data compiled by Bloomberg show. The drop is the biggest since September 29.
“This is another step to cutting overall financing costs,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd, said in a phone interview. “The PBOC wants to use this to guide commercial bank lending rates lower as they are still relatively high on a historical basis.”
Premier Li Keqiang has accelerated reforms as a borrowing spree which started after the 2008 financial crisis prompted economists including those at JPMorgan Chase & Co to compare it to debt surges that tipped Asian nations into repayment troubles in the 1990s. The PBOC provided 100 billion yuan to each of the nation’s five biggest lenders last month, after cutting reserve requirements for some banks in the second quarter.
Economic growth slowed to a five-year low of 7.2 per cent in the third quarter, based on the median estimate in a Bloomberg survey before an October 21 report. September’s inflation rate was 1.7 per cent, the lowest since October 2012, a separate survey showed before data tomorrow.
New local currency loans dropped to 385.2 billion yuan in July, the least since December 2009, while aggregate financing plunged to 273.7 billion, the lowest since 2008. The two measures will rebound to 750 billion yuan and 1.15 trillion yuan, respectively, in September, according to the median estimates in a Bloomberg survey before reports due as early as today.
“The dovish policy adjustment is aimed at lowering funding costs in the economy, and reflects concern over slow growth of credit and weakening economic momentum,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “It is a strong signal that the central bank is trying to create more accommodative conditions in the money market.”
The seven-day repo rate, a gauge of interbank funding availability, fell four basis points to 3.01 per cent, according to a daily fixing released by the National Interbank Funding Center around 11am in Shanghai. The 14-day gauge climbed 11 basis points to 3.39 per cent.
Government bonds rallied, with the yield on the notes due September 2024 falling three basis points, or 0.03 per centage point, to 4 per cent, according to data from the National Interbank Funding Center.
“There’s room for a further cut in the rate for 14-day repo agreements if the economy continues to be on a downward trajectory,” said Guan Qingyou, a Beijing-based economist at Minsheng Securities Co. ― Bloomberg