China’s short-term rates sink as rumours swirl of government support

By Winni Zhou and Andrew Galbraith

SHANGHAI, Nov 26 (Reuters)Chinese government-backed entities may be stepping in to relieve investor anxiety following a string of high-profile bond defaults, traders and investors say, sending short-term borrowing costs plunging and exchange trading volume surging.

The volume of seven-day repurchase, or repo agreements on the Shanghai stock exchange CN7DRPO=SS surged to an all-time high on Wednesday as huge quantities of cheap funds flooded the market. Banks and other financial firms use the agreements to borrow money from each other, with bonds as collateral.

The deluge of liquidity alleviated financing difficulties at non-bank financial institutions, traders said, as many institutions had raised standards for pledged collateral following a series of high profile defaults at state-run companies.

Several traders said there was market speculation that the funds were a form of government support. They were mostly offered at 2.4% for the seven-day contract, compared with the previous day’s close of 3.34%.

Full-day volume hit a record 623 billion yuan ($94.88 billion), compared with 124 billion yuan a day earlier.

“The huge fund injection soothed market sentiment,” said a trader at a joint-stock Chinese bank.

Markets widely speculated the so-called “national team” of government-backed entities was lending support to prevent debt risks from spreading.

A spurt of missed debt repayments by three Chinese state-owned firms – a coal miner, a chipmaker and an automobile company – has shaken local markets and heightened speculation that a campaign to wean the economy off heavy credit is back.

Ming Ming, head of fixed income research at Citic Securities, said recent credit risk events had soured market sentiment and left some bond funds under redemption pressure.

“Increasing the total amount of funds in the exchange repo market helped strengthen targeted financial support for non-bank institutions,” and also helped to resolve a liquidity shortage, Ming said.

The funds offered on Wednesday could also help to tide financial institutions over amid higher month-end cash demand.

A second trader at a Chinese bank said that interbank yields also fell due to a spillover effect.

Official data showed that the cost of seven-day repo funds on the exchange was 2.465% at the end of Wednesday, down 88 basis points from a day earlier. Interbank rates for the same tenor CN7DRP=CFXS closed at 2.34%, but was still double the average levels at the end of September.

The People’s Bank of China (PBOC) has continuously injected small amounts of cash on a net basis into the interbank money market this week, in an attempt to stabilise market sentiment, traders said. CN/MMT

($1 = 6.5660 Chinese yuan)

(Reporting by Winni Zhou and Andrew Galbraith; Editing by Kim Coghill)

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