STABLE INCREASE OF
REPO TRANSACTIONS WITH THE DECLINING TURNOVER OF BOND MARKET
Compared to June, the funding market did not change significantly in July, with a 1.3 per cent turnover increase. At the beginning of July, the weighted interest rate of funding continued to drop. On July 2, the daily weighted interest rate fell to 1.973, the lowest of the month. Driven by consecutive open market operations by the People's Bank of China (PBC) for the purpose of raising the bidding rate, the funding rate of interest rose gradually in the second half of the month.
Interbank funding concentrated on short-term maturities, with an increasing turnover of overnight products, up 25.11 per cent over June, and that of the 7-day products increased by 6.25 per cent. The turnover of short-term products within 20 days accounted for 97.47 per cent of the total turnover.
The repo rate moved steadily with active daily transactions
Supported by the bottom line of financial institutions' capital cost, the daily weighted repo rate moved steadily between 1.949 and 1.953, within the slight 0.4 basis point band. 1.950 will become the bottom line of the repo rate on the interbank repo market unless the interest rate is slashed further. The repo market was hardly affected by the IPOs in the capital market, which differed from the funding market. The daily average turnover changed slightly and increased gradually in July.
The 7-day products rose by 19.18 per cent in the repo market compared with that in June. The 14-day and 21-day products increased by 11.13 per cent and 176.74 per cent respectively. The turnover of short-term products within 30 days accounted for 98.31 per cent of the total turnover, which reflected concentration on the short-term. The repo transactions of the 6-month and 12-month were strikingly active, which might be influenced by open market operations of 6-month repo by the PBC.
Turnover of bond market declined and the yield to maturity (YTM) rebounded
Since June 25, the PBC consecutively made 6-month and 12-month repos, instead of the open market operation of reverse repo, and has gradually increased the repo rate. This went out of market expectations and was reflected immediately in the bond market. After July 2, another repo of the PBC, the daily weighted yield began to rise successively. The rise of issuing rates on the primary market hampered the atmosphere of making a long position in the interbank bond market, which pushed the increase of yield.
The decline in bond price resulted in declining turnover. Since the middle of July, the average daily turnover in the bond market fell to RMB one billion yuan from RMB three billion yuan. The situation was different from the soaring market in June.
The institutional funding situation
The structure of inter-institutional capital flow remained the same in July. The state-owned commercial banks are still the largest net money suppliers, followed by other commercial banks. Investment funds became net lenders for the first time, which was caused by the huge amount of bonds they brought in July.
(by Chen Lifeng)