(Bloomberg) -- China’s money markets are expected to see a liquidity withdrawal of more than 3 trillion yuan ($411 billion) over the remainder of this month, helping to keep funding costs elevated before key meetings of lawmakers in March.
Most Read from Bloomberg
-
SpaceX Bid to Turn Texas Starbase Into City Is Set for Vote in May
-
Saudi Arabia’s Neom Signs $5 Billion Deal for AI Data Center
-
Cutting Arena Subsidies Can Help Cover Tax Cuts, Think Tank Says
The bulk of the liquidity drain will come from the 2.4 trillion yuan needed to pay back the maturities of so-called policy loans from the central bank. A further 820 billion yuan is expected to be absorbed by bond issuance from local governments, based on monthly estimates from brokerage Huachuang Securities and data compiled by Bloomberg.
Keeping liquidity tight is seen as beneficial to the authorities as a way to help support the yuan at a time of uncertainty over US tariffs. The People’s Bank of China has drained about 1.5 trillion yuan of funds from the money market through its daily open-market operations since traders returned from Lunar New Year holidays on Feb. 5.
“Ensuring interbank liquidity conditions are relatively tight is indeed helpful in defending the onshore yuan amid such a volatile environment,” said Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong. “China will likely keep things stable for the time being,” especially given the potential negotiations on tariffs between US President Donald Trump and China’s President Xi Jinping, she said.
The overnight and seven-day repo rates both rose in Friday’s morning trading, as supply for loans fell short of demand, according to money market traders. The funding cost for overnight cash is 20-30 basis points above the weighted average price, they said.
Yield on one-year sovereign note spiked 10 basis points to 1.38%, while the benchmark 10-year yield also edged higher. The moves came after results from the latest bond auction signaled limited demand.
In one sign of tighter liquidity in the interbank market, the spread between the overnight repo rate and the policy repo rate expanded to as much as 41 basis points this week, near the widest level in four years.
China’s so-called Two Sessions — the annual meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference — are set to take place in Beijing next month. Investors are expecting officials to announce new fiscal-stimulus measures to boost the struggling economy, with some also anticipating additional monetary easing.