PBOC to offer 14-day reverse repos

Bloomberg

China’s central bank injected cash into the financial system using 14-day reverse-repurchase agreements for the first time since February amid speculation policy makers are looking to increase the use of more expensive, longer-term funding to cool a bond rally.
The People’s Bank of China auctioned 50 billion yuan ($7.5 billion) of the contracts in open-market operations at 2.4 percent on Wednesday, according to a statement on its website. The central bank also offered 90 billion yuan of seven-day reverse repos at 2.25 percent. Both rates were unchanged from previous sales.
The return of the 14-day contracts comes amid speculation the monetary authority will seek to curb the use of short-term borrowing to finance bond purchases. A record rally in China sovereign debt has prompted traders to increase leverage to amplify returns, with transactions of overnight repo agreements climbing to a record 50.4 trillion yuan in July, compared with a monthly average of 31.8 trillion yuan last year.
“The offering of long-term funds seems to be sending a signal to warn market participants not to get excessively leveraged,” said Liu Changjiang, a bond analyst at Soochow Securities Co. in Shanghai. “The follow-up impact hinges on what the PBOC plans to do next – whether it will continue to offer 14-day reverse repos and any other policies – so the market can gauge its determination.”
The benchmark 10-year bond yield dropped to a decade-low of 2.64 percent on August 15. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose two basis points to 2.53 percent as of 5 p.m. in Shanghai on Wednesday after surging the most since July 2015 on Tuesday.
The benchmark seven-day repo rate advanced as much as 13 basis points to a five-month high of 2.53 percent, weighted average prices from the National Interbank Funding Center show. The 14-day contract rose nine basis points to 2.79 percent.
The reverse repo has become the PBOC’s main interest-rate tool, meaning that the central bank could be abandoning the benchmark deposit and lending rate as policy instruments, said Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong. She said she sees the open-market operations as aimed at building a short-term yield curve. Rates rose in general because the market sees no near-term cuts in interest rates or bank reserve requirements, said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale SA.
The central bank has also gauged demand for 14-day reverse repos for Thursday, according to a trader at a primary dealer that bids in the open-market operations.

‘Bubble Risk’
“The recent rally in bonds, fueled by leverage on the back of stable short-end funding, raised concern about a potential asset bubble risk,” said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. “The PBOC may want to curb leverage in bonds as funding costs of the 14-day reverse repo is higher that for the seven-day and overnight reverse repos. Bond yields may go up as a knee-jerk reaction, but this may also create an opportunity for traders to buy bonds on the dip.”
In the currency market, the onshore yuan declined 0.19 percent to 6.6532 a dollar, according to China Foreign Exchange Trade System prices. The offshore currency declined 0.13 percent, while a gauge of dollar strength rose for the fourth day in a row.

China imposes caps
on P2P loans to curb
shadow-banking risks

Bloomberg

China imposed limits on lending by peer-to-peer platforms to individuals and companies in an effort to curb risks in one part of the loosely-regulated shadow-banking sector.
An individual can borrow as much as 1 million yuan ($150,000) from P2P sites, including a maximum of 200,000 yuan from any one site, the China Banking Regulatory Commission said in Beijing on Wednesday. Corporate borrowers are capped at five times those levels.
Tighter regulation may encourage consolidation that aids the industry long-term, said Wei Hou, a banking analyst at Sanford C. Bernstein in Hong Kong.
China’s authorities are concerned about defaults and fraud among the nation’s 2,349 online lenders. In December, the country’s biggest Ponzi scheme was exposed after Internet lender Ezubo allegedly defrauded more than 900,000 people out of the equivalent of $7.6 billion. The nation has 1778 “problematic” online lenders, according to the CBRC.
The P2P lenders are barred from taking public deposits or selling wealth-management products and must appoint qualified banks as custodians and improve information disclosure, the regulator said.
China’s P2P industry brokered 982 billion yuan of loans in 2015, almost quadruple the amount in 2014 and an approximately 10-fold increase from 2013, according to Yingcan. P2P firms attracted more than 3.4 million investors and 1.15 million borrowers in July, with loans extended at an average
interest rate of 10.3 percent, according to Yingcan.