On Friday overnight yuan borrowing costs surged:
- China’s interbank overnight repo rate hits 10%
The squeeze comes amidst plenty of promises that extra liquidity will be provided soon, before the long Lunar New Year holiday at least (which is still a way away, commencing on February 11).
On Friday the People’s Bank of China said it would not be raising the costs of the standing lending facility (SLF). This had been rumoured in the market. Also on Friday the PBOC did add funding to the market via OMOs, not a huge amount to be sure but it was the first injection for a week.
On the 7-day repo rate, its close to the SLF rate, which is considered the ceiling of China’s interest-rate corridor (overnight repo rate is already above it).
The PBOC is mindful of the support the squeeze on rates gives the yuan. The currency has stabilised somewhat after it’s strong gains, which may partly reflect corporate demand as exporters cover dollar revenues ahead of the Lunar New Year. I doubt the Bank wants a much stronger currency from here.
