Chinese overnight rate spikes to 16% as cash tightens ahead of holiday

01/15/2025

1 minute read

2025.01.15 08:28

SHANGHAI (Reuters) – Overnight borrowing costs for some Chinese financial institutions jumped as high as 16% on Wednesday, according to traders, due to tight cash supplies in the market ahead of the week-long Lunar New Year.

In addition to seasonal factors, some market participants said the country’s central bank has been cautious with cash injections due to concerns about sliding bond yields and a weak yuan.

Traders said overnight borrowing costs surged as high as 16% in the afternoon, while some 7-day borrowing costs jumped to 10%.

The average rate of overnight repurchase transactions (repos) in the interbank market – a gauge for cash conditions – rose as much as 3.5%, the highest level since October 2023. It is normally in a tighter range, around 1.5%, straddling 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.

Surging overnight borrowing costs mean investors are less likely to buy the country’s treasury bonds, as the funding costs far exceed the return. For example, the 10-year treasury yields only around 1.6%.

On Wednesday, the People’s Bank of China injected 959.5 billion yuan ($130.87 billion) via seven-day reverse repos in open market operations, when 995 billion yuan of one-year medium-term lending facility loans and 1.1 billion yuan worth of reverse repos were due to mature. It resulted in a net cash withdrawal of 36.6 billion yuan.

The central bank has repeatedly warned about bond investment risks as investors have rushed into safe-haven assets, driving treasury yields near record lows.

Investments in governments bonds are not risk-free, a Chinese central bank official said on Tuesday, warning of a potential market bubble and resulting turbulence if bond yields departed from economic fundamentals.