SHANGHAI China's interbank funding costs surged again on Thursday, with the two shortest-term rates hitting record highs, as the central bank again ignored market pressure to inject funds into the market, despite fresh evidence that the economy is slowing.
The People's Bank of China (PBOC) told the market that it would not conduct repo business in its regular open market operations on Thursday, frustrating widespread expectations that it would use reverse repos to inject cash to ease an acute market squeeze over the last two weeks.
By not easing liquidity conditions, it could exacerbate an economic slowdown that already appears well under way. China's factory activity weakened to a nine-month low in June as demand faltered, a preliminary survey showed on Thursday.
The benchmark weighted-average seven-day bond repurchase rate jumped a whopping 380 basis points to a record high of 12.06 percent, while the overnight repo rate surged 598 bps to 13.85 percent.
The State Council, China's cabinet, reiterated its commitment to prudent monetary policy and moderate credit growth risks at a meeting on Wednesday afternoon.
If money market rates remain high, it could translate into higher financing costs for businesses, economists say.
"The central bank appears to be determined to force banks and other financial institutions, such as funds, brokerages and asset managers, to de-leverage," said a trader at a major Chinese state-owned bank in Shanghai.
"That hardline stance suits the recent government policy of clamping down on non-essential businesses by financial institutions, such as shadow banking, wealth management, trust operations and even arbitrage."
The money market squeeze that began early this month has worsened this week, forcing banks and other financial institutions to trim non-essential businesses, traders said.
The market has recently been hit by heavy demand for funds, including from the approach of the quarter-end, when banks need more cash to meet regulatory checks and to boost reported deposit totals in their quarterly reports to shareholders.
Panic prevails in some parts of the money markets in particular among some small financial institutions, which have conducted lots of leverage businesses, traders said.
But a full-blown crisis is unlikely as liquidity is expected to improve significantly from mid-July, after the seasonal effects of the quarter-end fade and a large volume of maturing PBOC bills and government bonds injects cash into the market, traders said.
As an indication that the market expects improved cash supply in coming weeks, the 14-day repo rate fell 52 bps to 7.41 percent in early trade on Thursday, while the 21-day rate rose a moderate 8 bps to 7.59 percent.
(Editing by Jacqueline Wong)