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China's central bank cut the yield for a key short-term money rate on Tuesday for the fourth time this year, as regulators step up efforts to reduce funding pressure on Chinese companies.
The reduction of the yield on the 14-day bond repurchase agreement (repo) to 3.2%, from 3.4%, follows a surprise cut to benchmark lending rates on Friday to support the cooling economy, and follows similar moves in October and July as growth wobbled.
Expectations for further easing have stimulated stock markets in China and abroad, while depressing domestic bond yields and putting downward pressure on the yuan.
"This signals the central bank will make further efforts to lower borrowing costs for investors and support liquidity," said a trader at a city bank in Shanghai.
The People's Bank of China cut one-year benchmark lending rates by 40 basis points to 5.6% late on Friday, and at the same time increased the maximum payable deposit rate to 3.3% from 3.2%.
On Tuesday, it drained 5 billion yuan ($814.17 million) from money markets through 14-day repos. The size of the issue was negligible, but traders read the decision to cut the official yield as a further reminder to Chinese financial institutions to lower the cost of money.
The traded yield on the 14-day repo had already fallen sharply on Monday, and is now down over 60 basis points (bps) from Friday's weighted average rate. But it did not respond strongly to the announcement, with the average standing at 3.81% at midday.
Other money rates continued to decline, with the benchmark seven-day repo weighted average at 3.3013% at midday, down 20 bps from 3.5052 on Monday, when the rate plunged nearly 50 bps as the market opened.
MESSAGE RECEIVED?
Chinese banks rely on the interbank market to keep enough cash on hand to run ATMs, make loans, and repay investors in wealth management products, but insiders say they have abused the market at times, borrowing quick cash for short periods to fudge their balance sheets to meet regulatory requirements.
Traders say the PBOC has therefore increasingly relied on sending discreet messages through issuance amounts, tenors and official yields to encourage banks to take on more or less risk given economic conditions, and its moves have been watched by stock investors for signs of changes in monetary stance.
China's economy is heading towards its slowest expansion in nearly a quarter of a century as factory growth stalls and the property market weakens. Many firms are also struggling with debt, as slowing sales crimp their ability to pay back loans.
"Corporate leverage has exploded in China," warned Ron Temple, managing director at Lazard Asset Management, during a recent UBS investor forum.
"We've gone from 136% of GDP in 2011 to 168% in 2013. Taking into account 10% nominal GDP growth, that means corporate debt in China grew 50% in two years."
WEAK APPETITE FOR CREDIT
A study of Reuters data showed the lending rate cut by itself could bring little relief to smaller firms struggling with the most worrisome debt burdens, as banks increasingly favour companies that are either highly solvent or backed by an implicit government guarantee.
While at least eight mid-sized banks have raising deposit rates to the new maximum to compete for customers, whether the guidance loan rate will spur more lending remains in question, given that banks have been legally free to decide their own loan rates since June 2013, and yet have remained reluctant to lend.
Government insiders told Reuters that concerns about debt loads at Chinese firms, combined with fears of deflationary risks, have triggered a change in attitudes, and regulators are now considering embarking on a longer loosening cycle that could even include a cut to bank reserve requirement ratios, which would flood markets with fresh cash.
