China’s borrowing costs surge ahead of Lunar New Year

Chinese financial institutions faced a surge in overnight borrowing costs, reaching up to 16 per cent on Wednesday due to limited cash supply before the Lunar New Year holiday.

Some market participants believe that the central bank in the country has been cautious with cash injections due to concerns about declining bond yields and a weak yuan, in addition to seasonal factors.

Traders reported that overnight borrowing rates spiked to 16 per cent in the afternoon, with 7-day borrowing rates also rising to 10 per cent.

The average rate of overnight repurchase transactions (repos) in the interbank market, a measure of cash conditions, increased by up to 3.5 per cent, the highest level since October 2023. Typically around 1.5 per cent, it usually hovers close to the policy rate.

“Everyone thought that, just like yesterday, the major state banks would inject funds, but they did not,” said a trader at a regional bank who declined to be named.

Rising overnight borrowing costs make investors less inclined to purchase the country’s treasury bonds due to high funding costs that surpass the returns, with the 10-year treasury yielding approximately 1.6 per cent.

China’s central bank on Wednesday injected 959.5 billion yuan through seven-day reverse repos in open market operations, offsetting the maturing 995 billion yuan of one-year medium-term lending facility loans and 1.1 billion yuan of reverse repos.

Attribution: Reuters

Subediting: M. S. Salama