(Bloomberg) — China drained the most short-term liquidity from the banking system in a year on a net basis as it reduced support after a week-long holiday. Government bond futures slid by the most since August.
The People’s Bank of China offered 10 billion yuan ($1.6 billion) of short-term funds to lenders, resulting in a net liquidity withdrawal of 330 billion yuan taking into account maturities. The operation broke a pattern where the central bank had added 100 billion yuan on a gross basis each day in the past five sessions.
The PBOC had boosted liquidity in the run up to the National Day holidays to ease tightness caused by seasonal demand for cash from banks toward quarter-end. Policy makers may also have felt a need to add funds due to uncertainties surrounding China Evergrande Group. Investors are still waiting for the embattled firm to disclose details of its “major transaction” while another developer’s shock default has stoked contagion fears.
“The net drain suggests that China is moving back to normalizing policy after significant net injections prior to Golden Week,” said Mitul Kotecha, chief emerging-markets Asia and Europe strategist at TD Securities in Singapore. “Markets will likely be disappointed given expectations that liquidity would remain flush. It suggests less probability of a near-term reserve requirement ratio cut and will likely pressure bond yields higher.”
China’s 10-year bond futures fell as much as 0.4% to 99.495, set for the biggest one-day decline since Aug. 26. Seven-day interbank repurchase rates slipped 14 basis points to 2.14%.
“The PBOC is exiting the’alert’ mode, which was triggered by property default concerns,” said Hao Zhou, senior emerging-markets strategist at Commerzbank AG in Singapore. Still, bond markets are likely to be directionless for the time being as they await further developments, he said.
There remains plenty of uncertainty about how the PBOC will manage liquidity. About 1 trillion yuan of policy loans, including those injected via the medium-term lending facility, are due next week.
Chinese sovereign bonds rallied from the middle of June as signs growth was slowing fueled speculation the central bank will make another RRR cut to support the economy. Benchmark 10-year yields dropped to a 14-month low of 2.81% in August. They have now crept back up to 2.91%.
Measures to rein in the property market, a global energy crisis and faltering consumption have led economists to pare back full-year growth predictions, many below 8%.
“Downside risks to the economy are notable and credit growth is slowing down,” said Michelle Lam, greater China economist at Societe Generale SA in Hong Kong. “We’re not getting a strong indication that the PBOC is offering help to the property sector but they should act soon.”
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