Overnight Borrowing Costs Surge in China

SHANGHAI (Reuters) – Overnight borrowing costs for some Chinese financial institutions spiked to 16% on Wednesday due to tight cash supplies ahead of the Lunar New Year.

Market participants also noted that the central bank has been cautious with cash injections, concerned about declining bond yields and a weakened yuan.

Traders reported overnight borrowing costs soaring to 16% in the afternoon, while 7-day borrowing costs increased to 10%.

The average rate of overnight repurchase transactions (repos), an indicator of cash conditions, jumped by 3.5%, reaching its highest level since October 2023, compared to a usual range around 1.5%.

A trader at a regional bank noted that expectations for major state banks to inject funds were unmet.

High overnight borrowing costs discourage investors from purchasing treasury bonds, as funding costs overshadow returns; for instance, the 10-year treasury yields only about 1.6%.

On Wednesday, the People’s Bank of China injected 959.5 billion yuan ($130.87 billion) through seven-day reverse repos during open market operations, netting a cash withdrawal of 36.6 billion yuan.

The central bank alerted investors about bond investment risks as they flocked to safe-haven assets, pushing treasury yields near all-time lows. A warning was issued about a potential market bubble.

Ten-year sovereign bond yields increased nearly 1 basis point on Wednesday.

($1 = 7.3316 Chinese yuan renminbi)