PBOC Drains Most Money in Four Months Amid Calls for Easing

(Bloomberg) -- China's central bank drained the most funds from the financial system in four months, mopping up liquidity added over the last three weeks, even as economists predicted monetary easing to limit the fallout from last month's Brexit vote.

The People's Bank of China withdrew a net 645 billion yuan ($96 billion) from the financial system in the past five days in open-market operations. That's the biggest weekly withdrawal since March and follows a 625 billion yuan injection in the previous three weeks amid quarter-end demand. The PBOC may cut lenders' reserve ratios to cushion the impact of Britain's vote to leave the European Union, according to HSBC Holdings Plc and AXA Investment Managers Asia Ltd.

The seven-day repurchase rate, a benchmark gauge of interbank liquidity, averaged 2.28 percent this week, down from 2.36 percent in the previous week. The rate rose two basis points to 2.29 percent as of 4:30 p.m. in Shanghai on Friday, weighted average prices from the National Interbank Funding Center show.

“The central bank may not want to confuse market expectations by loosening further while there's ample liquidity in the banking system,” said Song Qiuhong, an analyst at Shunde Rural Commercial Bank Co. in Foshan in Guangdong province. “It'd be very cautious about rolling out any further easing measures.”

Swaps, Economy

China's interest-rate swaps halted a streak of declines in the absence of immediate easing measures from the PBOC following the Brexit vote. Reductions to lending and deposit rates can't be ruled out if second-quarter economic data fall short of expectations, researchers at the National Development & Reform Commission wrote in a Shanghai Securities News commentary.

The PBOC will cut benchmark policy rates by 25 basis points this month and lower bank reserve-requirement ratios in the second half, Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note last week.

The cost of one-year interest-rate swaps, the fixed-payment to receive the floating seven-day repurchase rate, climbed one basis points from a week earlier to 2.42 percent, data compiled by Bloomberg show. The yield on government notes due May 2026 was little changed at 2.80 percent, according to National Interbank Funding Center prices.

The central bank has been allowing banks to submit demand for the Medium-term Lending Facility every Friday since last month, according to two people with knowledge of the matter. The MLF is a regular tool used to manage liquidity, and financial institutions can report demand at any time, according to a PBOC statement e-mailed on Friday.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net. To contact the editors responsible for this story: Robin Ganguly at rganguly1@bloomberg.net, Phani Varahabhotla

With assistance from Helen Sun