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O/N Repo Rate Rises After Neutral OMOs, Reaction Muted Vs. Last Week

CHINA RATES

The PBOC matched liquidity withdrawals with injections today, but used the 14-day repo tool as we get closer to LNY.

  • The lack of outright injection shows the PBOC is still cautious over the levels of excess liquidity in the system.
  • The overnight repo rate has risen following the OMOs, the rate is 21bps higher at 2.0761% but still way below the panic driven highs of 3.5698% last week.
  • China is trying to assuage tightening fears stemming from their approach to liquidity operations. The Securities Times published a commentary yesterday that said the PBOC's recent OMOs are a sign it is seeking to keep liquidity "tightly balanced" to prevent risks stemming from leverage. Elsewhere, other state media last week published commentary effectively telling people not to worry about the availability of funds.
  • As a note, market participants now appear to have largely discounted an MLF operation next week, with expectations that the bank will add liquidity up to a net CNY 500bn heading into the holiday.
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