PBOC Drains Liquidity

The PBOC conducted a net drain from the financial system today to the tune of CNY 40bn, the last time the bank injected liquidity was Feb 25. The overnight repo rate declined to 2.10% after jumping as high as 2.40% on Friday prior to the Labor Day break. The 7-day repo rate also dropped to 2.1325% from 2.425% on Friday. Futures are slightly higher, 10-year up around 4.5 ticks at 97.97.

• Elsewhere, 3-year AAA spreads widened on the back of credit stress for property developers including Sichuan Languang, Moody's downgraded Languang Development's rating further into junk territory which saw the firms 2022 dollar bonds hit fresh record lows. A spokesman for Huarong said its prepared to make bond payments and that state backing is still in place. There were reports though that Vice Premier Li, a proponent of letting state owned companies default, will decide the fate of the company.
• Meanwhile China's regional authorities are trying to prevent financial risks by scrutinizing lenders including those serving small companies, with Beijing, Shanghai and Jiangsu provinces releasing new rules to combat unlicensed financial activities, the Economic Information Daily reported. Authorities are concerned that the central government's increasing pressure over fintech giants may cause the risks to spread to other lenders, the daily said citing analysts. Local authorities should clarify the legal status of microfinance companies, the newspaper said citing Dong Ximiao, the chief researcher at Merchants Union Consumer Finance Co Ltd.