Weekly Market Outlook

PBOC Drains Most Funds in Six Months Amid Debt Curb Speculation

China’s central bank drained the most funds from the financial system in six months, adding to speculation that it is keeping a tight rein on cash supply as part of efforts to curb excessive leverage.

The People’s Bank of China pulled a net 245 billion yuan ($37 billion) from the financial system through reverse-repurchase agreements, the biggest one-day withdrawal since March 4. This follows last week’s 670 billion yuan injection to meet pre-holiday demand. The benchmark money-market rate reacted to Monday’s open-market operations by surging the most in five months.

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 in the past 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. Chinese markets will be closed in the week through Oct. 7.

“The PBOC’s intention to curb leverage has been obvious ever since it resumed the use of the longer-tenor reverse repos,” said Chen Long, an analyst at Bank of Dongguan Co. in Guangdong province. “The bias is toward tightening, and it doesn’t want liquidity to be too loose. But it will avoid any unintended consequence — that’s why we saw it increasing injections last week to tame money rates.”

The seven-day repurchase rate, a gauge of interbank funding availability, rose 11 basis points to 2.44 percent as of 3:09 p.m. in Shanghai. Government bonds climbed, with the 10-year yield falling three basis points to 2.72 percent. The nation’s debt market is poised for a 13th quarterly gain, a record winning streak, according to an index compiled by Bank of America Merrill Lynch.

Stock markets fell Monday, with the benchmark Shanghai Composite Index tumbling 1.8 percent to finish the day below the 3,000 level for the first time since early August. This is only the second time in more than a month that the gauge has moved more than 1 percent on a closing basis.

In the currency markets, the exchange rates in both Shanghai and Hong Kong were little changed before the yuan enters the International Monetary Fund’s reserves basket on Oct. 1. There is consensus that the yuan will be managed tightly ahead of the inclusion, Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore, wrote in a note. Investors are likely to stay on the sidelines this week and refocus on the yuan after the holidays, he said.

— With assistance by Helen Sun