Some primary interbank money rates in China rose on Monday, driven by signs of tightness in cash conditions amid rising worries over a recent acceleration in local government bond issuance.
The volume-weighted average rate of the benchmark overnight repo traded in the interbank market rose to 2.1576% on Monday afternoon, the loftiest level since August 13.
Traders said the higher interbank borrowing cost came as market sentiment was hurt by an expected increase in local government bond supply that could drain huge amounts of cash from the banking system.
Issuance in August has so far risen to about 860 billion yuan ($132 billion), according to calculations based on official statistics, more than 30% above July’s total issuance and not far from this year’s high of 875.3 billion yuan in May.
The pace of local government borrowing has been generally slow this year, with a total of about 1.35 trillion yuan issued in the first seven months, around 36% of this year’s special bond quota of 3.65 trillion yuan.
Politburo move
Expectations of increased local government bond issuance rose after the Politburo, the ruling Communist Party’s top decision-making body, said late last month that China would stick with its accommodative economic stance. It said fiscal policy should be proactive and more effective in managing the pace of local government bond issuance.
“Funding-wise, we expect the growth in net government bond financing amount to accelerate as the issuance of treasury bonds and local government bonds has sped up significantly since mid-August, and the expiry amount is relatively small in September and October,” analysts at CICC said in a note.
“This should enable infrastructure investment to provide countercyclical support, in our view. That said, supervision remains strict over local governments’ implicit debts, and the leverage effect of special government bonds may weaken.”
A recent resurgence in Delta variant outbreaks across the country, torrential rains and flooding and signs of slower economic growth have all led the authority to roll out more measures to underpin the economy.
Policy insiders said earlier in August that China is poised to quicken spending on infrastructure projects while the central bank supports the economy with modest easing steps.
• Reuters and Jim Pollard
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