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China’s Money Markets Ease as PBOC Acts to Avoid Liquidity Shock

(Bloomberg) -- China’s money markets eased from recent highs, after the central bank provided liquidity to stem a bond selloff that threatened to spark panic among retail investors.

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The overnight interbank funding cost is poised for its biggest weekly drop in six weeks, while yields on the one-year government bond fell by the most since August. The People’s Bank of China added short-term liquidity for a second day on Friday.

Chinese bonds came under pressure this week as traders pared back wagers on aggressive policy easing while recent policy measures supporting growth drove a stock rally. The spike in yields prompted retail investors to pull money from wealth-management fixed-income products, fueling a spiral of price declines and accelerating withdrawals.

“With more active liquidity management, the sentiment factors could fade soon,” Goldman Sachs analysts including Xinquan Chen wrote in a note. “We do not think this will become a liquidity shock comparable to previous risk events.”

Read: China Asks Banks to Report on Liquidity After Bond Slump (2)

The overnight repurchase rate, a gauge for short-term interbank borrowing costs, fell 32 basis points to 1.35% as of 11:00 a.m. local time, its biggest daily decline in two weeks. Yields on the one-year bond slid five basis points after surging more than 30 basis points in the past five sessions.

The PBOC provided a net nine billion yuan ($1.3 billion) of seven-day liquidity via its open-market operations on Friday, adding to the 123 billion yuan on Thursday. The central bank’s cash infusion with reverse repurchase contracts on a weekly basis has hit the highest amount since late October.

Policymakers have pumped in more than one trillion yuan of funds into the banking system with a combination of tools in November, according to a PBOC statement on Tuesday.

Worst Over

“The selloff has already calmed from the worst,” said Yang Yewei, an analyst at Guosheng Securities Co. “The PBOC may still like to see interbank rates at higher levels and would refrain from sizable monetary easing.”

Beijing has refrained from broad easing measures -- such as cutting interest rates or the reserve ratio -- as it sought to balance inflation concerns. Price pressure may accelerate as overall demand in the economy picks up, the central bank said in its quarterly monetary report this week.

“The path of reopening will put more upward pressure on China government bond yields,” said Kiyong Seong, lead Asia macro strategist at Societe Generale in Hong Kong, who expects the 10-year bond yield to end the year at 2.9% and rise to 3% in the first quarter in 2023.

The 10-year yield rose one basis point to 2.8% on Friday.

--With assistance from Chester Yung.

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