(MENAFN- Gulf Times) China's central bank pumped the most funds into financial markets in six months to ensure its intervention to prop up the exchange rate won't starve the economy of yuan € and still interest rates climbed.
The overnight repurchase rate rose 24 basis points since August 11, when authorities devalued the yuan, to a four-month high on Friday, even as the People's Bank of China injected a net 150bn yuan ($23bn) this week using reverse- repurchase agreements. The central bank also added 110bn yuan via its Medium-term Lending Facility on Wednesday.
China's currency has been relatively stable this week, after sliding 3% in the three days following the devaluation. JPMorgan Chase & Co says the PBOC will need to sell the greenback and buy yuan if it wants to re-anchor currency traders' expectations. Foreign-exchange reserves have already slumped $315bn in the year through July to $3.65 trillion and Bloomberg Intelligence estimates that every 1 percent drop in the yuan triggers about $40bn of outflows.
"It appears the PBoC is reluctant to use a strong dose like a reserve-requirement ratio cut at the beginning," said Wang Ming, chief operations officer at Shanghai Yaozhi Asset Management, which oversees 4bn yuan of fixed-income securities. "However, it may have to do so eventually should prolonged currency-market intervention drive money rates to levels that could hurt the economy."
In the days following the devaluation, the onshore yuan followed a pattern of rallies toward the close, sparking speculation the authorities were selling dollars. The yuan fell 0.15% on Friday to 6.3985 per dollar as of 11:18 a.m. in Shanghai, weakening as data suggested China's manufacturing is contracting in August by the most in six years.
The speed of the currency's drop had sparked concern that authorities were switching to a policy of competitive devaluations to shore up an economy growing at the slowest pace in six years. The current exchange rate is more consistent with economic fundamentals and there is no need to adjust it to boost exports, PBoC Deputy Governor Yi Gang said at an Aug. 13 press conference. The central bank has exited regular intervention, and will act when the market's volatility is excessive, Yi said.
"Front-end rates have been edging up, likely resulting from tighter liquidity conditions amid intervention," said Frances Cheung, head of Asia ex-Japan rates strategy at Societe Generale SA in Hong Kong. "The PBOC needs to step up its open- market operations to offset the liquidity withdrawal on the foreign-exchange side." She predicts the PBoC will cut lenders' reserve ratios by 100 basis points in the remainder of this year. The requirement for major banks is now at 18.5% of deposits, after two reductions in 2015.
Yuan positions at the central bank and financial institutions fell by the most on record in July, a sign capital outflows picked up. China needs to ease reserve requirements further if the positions keep falling sharply in August and September, Wang Yong, a professor at the PBoC's Zhengzhou training school, wrote in Shanghai Securities News.
The overnight repo rate, a gauge of liquidity in the banking system, was steady at 1.81% on Friday. That's up from a six-year low of 0.99% reached on May 29. The seven-day rate fell three basis points, after closing on Thursday at a six-week high of 2.58%.
"Short-end money rates have been excessively low in the last three months, and the situation is coming to an end with the overnight rate heading toward 2.5%," said Shi Lei, head of fixed-income research in Beijing at Ping An Securities Co, a unit of China's second-biggest insurer. "The PBoC's focus has switched to the exchange rate, and it can bear the liquidity tightening brought by the depreciation." The intervention will cost about $40bn a month for the rest of this year, according to the median of 28 estimates in a Bloomberg survey. Unless the central bank allows a freely- floating currency, it will be forced to reduce reserve ratios or seek other ways to inject liquidity, JPMorgan chief China economist Zhu Haibin wrote in a report last week.
"The yuan's depreciation is adding to the pressure for outflows," Bank of Communications Co chief economist Lian Ping said at a conference Thursday. "Given the high reserve-ratio level and liquidity demand, China is likely to lower it one or two times."
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