PBOC Drains Most One-Year Cash From Banking System, Bonds Slip

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(Bloomberg) – China drained the most short-term liquidity from the banking system in a year on a net basis as it slashed support after a week of vacation. Government bond futures have slipped the most since August.

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The People’s Bank of China offered 10 billion yuan ($ 1.6 billion) in short-term funds to lenders, resulting in a net cash withdrawal of 330 billion yuan including maturities. The operation shattered a pattern whereby the central bank had added 100 billion yuan gross every day for the past five sessions.

The PBOC had increased liquidity as the National Day holiday approached to ease the squeeze caused by seasonal demand for bank liquidity towards the end of the quarter. Policymakers may also have felt the need to add funds due to the uncertainties surrounding China Evergrande Group. Investors are still waiting for the ailing company to disclose details of its “major deal” as another developer’s default has fueled contagion fears.

“The net drain suggests that China is returning to policy normalization after large net injections ahead of Golden Week,” said Mitul Kotecha, chief emerging markets Asia and Europe strategist at TD Securities in Singapore. “Markets will likely be disappointed given expectations that liquidity will remain plentiful. This suggests a lower likelihood of a reduction in the reserve requirement ratio in the short term and will likely push up bond yields. “

Chinese 10-year bond futures fell 0.4% to 99.495, the biggest one-day drop since August 26. Seven-day interbank redemption rates slipped 14 basis points to 2.14%.

“The PBOC is coming out of ‘alert’ mode, which was triggered by real estate default issues,” said Hao Zhou, senior emerging markets strategist at Commerzbank AG in Singapore. Still, bond markets will likely be directionless for the time being pending further developments, he said.

Many uncertainties remain as to how the PBOC will manage liquidity. About 1,000 billion yuan in policy loans, including those injected through the medium-term loan facility, are expected next week.

Chinese sovereign bonds rallied from mid-June, as signs of slowing growth fueled speculation that the central bank will make another RRR cut to support the economy. Benchmark 10-year yields fell to a 14-month low of 2.81% in August. They have now risen to 2.91%.

Measures to curb the real estate market, a global energy crisis and faltering consumption have led economists to downgrade full-year growth forecasts, often below 8%.

“The downside risks to the economy are significant and credit growth is slowing,” said Michelle Lam, Greater China Economist at Societe Generale SA in Hong Kong. “We don’t have strong indications that the PBOC is offering help to the real estate industry, but they should act soon.”

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