China is swimming in cash with cheapest funding costs since 2006
March 26 2020 12:44 AM
China yen
As traders around the world struggle to get their hands on the dollar, liquidity in China is so plentiful that borrowing in yuan costs the least in 14 years


As traders around the world struggle to get their hands on the dollar, liquidity in China is so plentiful that borrowing in yuan costs the least in 14 years.
A gauge of short-term borrowing costs in China’s interbank market plunged for seven sessions to the lowest level since May 2006, showing abundant liquidity after the central bank reduced the amount of cash banks need to hold in reserve.
Interest-rate swaps at a nine-year low signal traders expect cash supply will remain ample in the near future, as the People’s Bank of China seeks to offset the economic impact of the virus outbreak.
The calmness in China’s money market is in stark contrast with the shortage of the greenback and fears of a credit crunch around the world. The yield gap between US commercial paper and risk-free rates has surged to levels last seen during the 2008 financial crisis, while the cost to insure dollar- and euro-denominated debt against default rose to new highs. That’s despite global central banks’ efforts to pump cash into their financial systems to avoid an economic crisis. “The additional liquidity that came under the reserve-ratio cut is stuck in China’s interbank market when real demand for credit is weak,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “The upcoming tax payment and quarter-end effects may lead to less loose liquidity conditions, but it should be far from tight.”
Here are five charts illustrating loose liquidity in China:
The overnight repurchase rate halved over the seven sessions to 0.7888% on Friday. Liquidity remains flush despite the PBoC refraining from injecting money in the financial system via reverse repos for 26 straight sessions, the longest hiatus since 2018.
The overnight rate dropped 2 basis points to 0.81% on Tuesday, while the seven-day tenor tumbled 39 basis points to 1.18%, the lowest level since September 2009.
The cost on China’s one-year interest-rate swaps tumbled to the lowest level since 2010 Tuesday, suggesting traders expect funding costs to drop even further. That’s because the PBoC is set for additional monetary policy loosening, with Standard Chartered predicting a 50 basis point cut to the reserve ratio in the next quarter.
China’s three-month Shibor, an indicator for borrowing costs in the money market, slumped for 37 days in a row to the lowest level in nearly a decade on Tuesday. That’s the longest run of declines since August 2018. The rate will continue to fall, a move that makes bonds more attractive, according to Ji Tianhe, a strategist at BNP Paribas SA in Beijing.
The onshore yuan’s next swap points plunged to the lowest level since 2018 last week before recovering. The drop reflects abundant supply of the currency versus the dollar in the foreign-exchange market. With negative short-term swap points, traders earn money when they loan out their greenback in exchange for the yuan.
Tumbling borrowing costs will benefit China’s government bonds. The overnight repo rate’s discount to the 10-year sovereign yield expanded to the largest in more than two months last week, suggesting buying the notes with funding obtained in the interbank market is becoming more lucrative.
The trading volume of overnight repo contracts climbed to the most on record Monday.

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