PBOC Drains Cash as China Markets Re-Open, Bond Futures Slide – Yahoo Finance

(Bloomberg) — China drained the most short-term liquidity from the banking system in a year on a net basis as it reduces liquidity support following a week-long holiday. Government bond futures declined.

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The People’s Bank of China offered 10 billion yuan ($1.6 billion) of short-term funds to lenders, resulting in a net liquidity withdrawal of 330 billion yuan taking into account maturities. The operation broke a pattern where the central bank had added 100 billion yuan on a gross basis each day in the past five sessions.

“The net drain suggests that China is moving back to normalizing policy after significant net injections prior to Golden Week,” said Mitul Kotecha, chief emerging-markets Asia and Europe strategist at TD Securities in Singapore. “Markets will likely be disappointed given expectations that liquidity would remain flush. It suggests less probability of a near-term reserve-requirement-ratio cut and will likely pressure bond yields higher.”

China’s 10-year bond futures fell 0.4% to 99.53, set for the biggest one-day decline since August. Seven-day interbank funding costs dropped 10 basis points to 2.17%.

The PBOC’s operations before the National Day holidays had helped ease recent tightness in liquidity that was caused by seasonal demand for cash from banks toward quarter-end. The central bank may also have felt a need to add funds due to uncertainties surrounding a debt crisis at China Evergrande Group. Investors are still waiting for the embattled firm to disclose details of its “major transaction” while another developer’s shock default has stoked contagion fears.

About 1 trillion yuan of policy loans, including those injected via the medium-term lending facility, are due next week.

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