PBOC pulls most funds since July

Bloomberg

China’s central bank conducted its biggest weekly cash withdrawals since July, amid speculation it is seeking to ease bubbles in assets including bonds and property.
The People’s Bank of China drained a net 420.1 billion yuan ($63 billion) from the financial system as maturing reverse-repurchase agreements exceeded new issuance. The nation’s benchmark money-market rate surged to a 14-month high Thursday as central bank withdrawals added to pressure created by quarter-end demand from commercial lenders.
The monetary authority has made it more expensive to borrow funds in the interbank market, with signs of an improving economy giving it room to focus on an overheated property market. A private gauge of manufacturing released Friday matched estimates for September, while earlier data showed new credit, industrial output and retail sales all picked up last month.
“There are signs that the local real estate market is overheated, and the PBOC may want to send a signal,” said Suan Teck Kin, senior economist at United Overseas Bank Ltd. in Singapore. The withdrawals could also be connected to the yuan’s entry into the International Monetary Fund’s reserves basket this Saturday, with China’s central bank controlling liquidity to limit depreciation pressures, he added.
Money Rate
The seven-day repo rate, a benchmark gauge of funding availability in the financial system, fell 17 basis points to 2.57 percent as of 11:59 a.m. in Shanghai, after rising to 2.75 percent on Thursday. The rate is heading for a third quarterly gain. The cost of one-year interest-rate swaps, the fixed payment to receive the seven-day repo rate, was set for a second quarterly increase, data compiled by Bloomberg show.
The nation’s home prices rose the most in six years in August, defying new policies to curb excessive speculation in big cities and government warnings about asset bubbles. The PBOC will make its next broad move by guiding interest rates through a corridor, rather than the traditional approach of changes to benchmark lending and deposit rates, according to a Bloomberg survey of 18 economists conducted Sept. 19 to 26.

Borrowing Concern
The monetary authority has signaled that it wants to limit runaway borrowing, with Deputy Governor Yi Gang cited as saying that the goal is to bring down leverage ratio growth. The central bank has since last month restarted the use of both 14- and 28-day lending tools — rather than just the seven-day tenor — for the first time since February, spurring concern that it is looking to increase the use of more expensive, longer-term funding to cool a bond rally. A Bloomberg China sovereign bond index rallied in all but one quarters since the beginning of 2014. Chinese markets will be closed the whole of next week.
The yield on sovereign notes due August 2026 was little changed at 2.74 percent, according to National Interbank Funding Center prices. The benchmark 10-year sovereign yield has declined 11 basis points since June 30 to 2.73 percent Thursday, ChinaBond data show.
In the currency market, the onshore yuan was little changed at 6.6698 per dollar in Shanghai, and down 0.1 percent in Hong Kong’s offshore market.