HONG KONG (Bloomberg) - China's benchmark money-market rate dropped the most in five months and the yuan weakened in offshore trading after the central bank cut borrowing costs and relaxed reserve requirements for some lenders.
The seven-day repurchase rate sank 25 basis points to 2.68 per cent as of 10:35 a.m. in Shanghai, a weighted average shows. Interest-rate swaps fell and bonds gained. The yuan retreated 0.11 per wat u thinkwat u thinkcent to 6.2124 per dollar in Hong Kong. Currencies declined across emerging markets open for trading as an increased risk of Greece leaving the euro bolstered demand for the greenback and the Japanese yen.
The People's Bank of China lowered its benchmark rates for the fourth time since November, announcing the move after the Shanghai Composite Index of shares tumbled 19 per cent over the last two weeks. Policy makers have resisted letting the yuan weaken this year, a move that would help boost exports, as they encourage greater global use of the currency in a push to win reserve-currency status at the International Monetary Fund.
"The PBOC's rate cuts added funds to the market," said Wang Ju, a senior currency strategist at HSBC in Hong Kong. "The central bank will keep monetary policy loose. We believe it will cut interest rates by 25 basis points and reserve-ratio requirements by 200 basis points by year-end, adding mild depreciation pressure to the yuan."
The central bank lowered its one-year lending rate by 25 basis points to a record 4.85 per cent. The one-year deposit rate was cut by a similar amount to 2 per cent, while reserve ratios for some smaller lenders were eased. The supply of cash in the financial system remains abundant and so there wasn't a need for reserve requirements to be lowered for all banks, the PBOC said.
The selective reserve-ratio cut will free up some 400 billion yuan ($64.4 billion), Haitong Securities Co. estimated.
"The PBOC's move signaled that it'll stick with a loose monetary policy for the rest of 2015," said Xie Yaxuan, Shenzhen-based chief economist at China Merchants Securities Co. "It might cut reserve requirements twice and interest rates at least once by year-end. These moves will challenge the yuan and keep the money-market rates low."
The seven-day repo rate, a gauge of interbank funding availability, declined for the first time in 14 days. The one- year interest-rate swap, the fixed payment to receive the floating seven-day repo rate, dropped eight basis points to 2.43 per cent. The yield on sovereign bonds due April 2025 fell one basis point to 3.61 per cent.
The yuan was unchanged from Friday at 6.2093 per US dollar in onshore trading, according to China Foreign Exchange Trade System prices. The currency's drop in Hong Kong, where it trades freely, was the biggest in three weeks and came about after Greece's government moved the nation a step closer to leaving the euro by effectively asking voters to decide on its membership.
"The Greek situation is the main driver" of the yuan's drop, said Irene Cheung, a currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. "It's also because of the interest-rate cuts in China, making it less bullish for the yuan. The interest-rate differential has narrowed."