China Rates Falling Most Since ’08 on PBOC intervention

The cost of locking in China’s interest rates fell the most since 2008 after the central bank pledged to tackle the nation’s worst cash crunch in at least a decade.

The People’s Bank of China has provided liquidity to some financial institutions to stabilize money-market rates and will use short-term liquidity operations and existing lending-facility tools to ensure steady markets, according to a statement posted on its website yesterday. It also called on commercial banks to improve their liquidity management.

“Policy makers are easing already and that’s why one-day, seven-day and other market rates have come down this week,” said Zhang Zhiming, head of China Research at HSBC Holdings Plc in Hong Kong. “They stopped taking away liquidity as a first step. If necessary, they will do reverse repos. They are not going to let interbank rates spike as they did last week. I don’t think they want to see that again.”

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repurchase rate, slid 33 basis points, or 0.33 percentage point, to 3.745 percent at 8:29 a.m. in Shanghai, data compiled by Bloomberg show. The rate dropped as much as 39 basis points earlier, the most since November, 2008. It reached an all-time high of 5.06 percent on June 20.

The PBOC’s statement is the first public confirmation that it is taking action to ease a cash squeeze that sent China’s overnight repurchase rate to a record last week and came hours after Ling Tao, deputy head of the the central bank’s Shanghai branch, said liquidity risks were controllable. Premier Li Keqiang is seeking to wring speculative lending out of the nation’s banking system after credit expansion outpaced economic growth.

Bloomberg

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