Interest rates in China have been on the rise. The 7-day repo swap rates have been increasing across all tenors. These swaps exchange the 7-day repo rate (reset weekly) for a fixed rate over a longer period (such as 2 years) - thus providing a window into the market's long-term expectations of repo rates. The increase is an indication of tightening liquidity conditions in the interbank market.
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| 2-year fixed for floating (7-day repo) swap rate (Bloomberg) |
China's central bank has been trying to add more liquidity to the money markets in order to stabilize rates (without adjusting the bank reserve ratio).
WSJ: - The People's Bank of China injected 220 billion yuan ($34.7 billion) into the money market Tuesday via reverse repurchase agreements offered in its regular open-market operation, continuing efforts to ease monetary conditions and bolster a slowing economy.
So far these liquidity injections have not worked, as demand for short-term money remains high and rates continue to rise.
Reuters: - China's key money rates ticked
higher on Tuesday, with the central bank's largest fund
injection since early July failing to ease conditions amid
elevated month-end cash demand and corporate tax payments.
The People's Bank of China injected 220 billion yuan into
the banking system via reverse repos on Tuesday, against a net
87 billion yuan scheduled to be drained this week due to
maturing bills, repos, and reverse repos.
That guarantees a net injection of at least 133 billion yuan
for the week not including additional reverse repos likely to be
auctioned on Thursday. Such an injection would be the largest
since the week of July 2-6.
"The market demand is quite large. Monday's demand was
really heavy. The central bank's action today basically just
satisfied current demand, but didn't in any way exceed it in a
way that would bring rates down," said a trader at a city
commercial bank in Shanghai.
The PBoC has been cautious about flooding the market with liquidity due to risks it could reignite
inflationary pressures. Yet left unchecked, rising interest rates could threaten growth, given that the GDP is already growing at the lowest rate since 2009. This will require a delicate balance for the central bank going forward.
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| China GDP YoY (Bloomberg) |
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