Two Chinese Bond Auctions Fail

Tyler Durden's picture

And while the US is no longer allowed to auction off debt, in China the PBoC appears to be no longer able to auction off debt. As Business China reports, "the central bank scheduled the auction of RMB 20 billion worth of
one-year treasury bonds and RMB 10 billion in six-month bonds on the
country’s interbank bond market for May 13. But banks, faced with tight
liquidity, only purchased RMB 11.71 billion worth of one-year bonds and
RMB 9.63 billion worth of six-month bonds, the report said." In other words, there was a nearly 50% miss on the 3 month auction. The key reason: "The reference yield of one-year treasury bonds was raised to 3.0246% from the previous issuance, while the bond yield of 182-day discounted treasury bonds was 2.91%, the paper said." It appears investors don't agree with the central planners that 3% is an appropriate rate to compensate them for surging inflation. That, and also the fact that banks suddenly have no liquidity: "Tighter liquidity was behind the under-subscription, as the central bank resumed selling three-year notes on May 12 after a hiatus of more than five months, a bank analyst who was not named was cited as saying. The central bank also raised banks’ RRRs by 0.5 percentage points on the same day, effective May 18, the fifth consecutive month its has raised RRRs this year." And so the Catch 22 emerges: the more China fights inflation through RRR or rate hikes, the lower the purchasing power of domestic banks to purchase bonds (and yes, the US deficit is just a few hundred billions dollars too wide for it to come to China's rescue). Should the "15 minute" inflationary conundrum continue to express itself, and China be forced to rise rates even longer, very soon the country, just like the US to which it is pegged monetarily, will also be unable to raise any incremental capital.

More from the article:

Analysts had reckoned the restart of three-year bill issuance had satisfied banks’ needs to reinvest in the product as the bills were the major kind of bills to mature in May, the paper said.

Besides, the central bank had been net injecting funds in the past three weeks after it squeezed the volume of the one-year bills to RMB 30 billion in the recent issuance on May 10, and the restart of the issuance of three-year bills was seen as the central bank’s attempt to strengthen its open market operations.

The market generally believed that the influence of the central bank’s open market operations had weakened recently and the diversification in tools used would help drain liquidity.

The restart of three-year bills was considered an appropriate tool in the central bank’s measures to drain liquidity, and the central bank would be more prudent in using RRRs after the resumption of three-year notes as the RRRs had already reached a record level before its fifth hike this month.

After the most recent RRR hike, China’s biggest banks will be required to put aside 21% of their deposits in reserve, based on earlier announcements made by the central bank.

Compounded by the effect of the three-year bills, the consecutive increases in RRRs have brought “real and heavy pressure” on small and medium-sized lenders, the paper said.

“We thought the central bank might want to rely more on open market operations and there would be less chance of an additional hike in RRRs this month after the restart of three-year bills… but the recent RRR hike really surprised the market and completely reversed investors’ earlier optimistic expectations,” an unnamed bank trader was quoted as saying.

And it's about to get worse: those who remember our charts from early this year showing the one week repo rate exploding ti 7%+, well: we are about to have a case of deja vu.

A large commercial lender, which used to be a fund provider, has started borrowing from the interbank market after the RRR hikes, another banker, who was not named, was cited as saying.

“Repurchase rates may surge this week as the latest RRR hike will take effect on May 18, and the stringent market conditions will last for the next two months,” the analyst was quoted as saying.

A recent China International Capital Corp. report estimates that the seven-day repo rate, which reflects money supply in the market, may top 4% at some points and will remain above 3% for a relatively long period.

Bottom line, don't expect a bounce in the SHCOMP any time soon.