China cuts key short-term money rate as Beijing pushes down cash costs

A man on Nov 24 talking on a phone in front of a Beijing commercial bank whose  display board shows the interest rate for fixed deposits. China's central bank cut  the yield for a key short-term money rate on Nov 25, following a surprise cu
A man on Nov 24 talking on a phone in front of a Beijing commercial bank whose  display board shows the interest rate for fixed deposits. China's central bank cut  the yield for a key short-term money rate on Nov 25, following a surprise cut to key lending rates  on Nov 21. -- PHOTO: REUTERS

SHANGHAI (Reuters) - China's central bank lowered the yield for a key short-term money rate on Tuesday, the fourth time it has done so this year, as regulators step up efforts to reduce funding pressure for Chinese companies.

The reduction, announced on its website (www.pbc.gov.cn), follows a surprise cut to benchmark lending rates on Friday to support the cooling economy, which has stimulated stock markets in China and abroad, depressed domestic bond yields and put downward pressure on the yuan currency.

"This is in accordance with the interest rate cut last Friday, and it 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 (PBOC) drained 5 billion yuan (S$1.06 billion) from the money markets through 14-day bond repurchase agreements on Tuesday, traders said.

The amount drained was minor, but the PBOC used the issue to reduce the official yield on the instrument, considered a mechanism of signalling to participants in the interbank market to lower the cost of money.

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.

Traders say the PBOC has therefore increasingly relied on it as a platform to send discreet messages through issuance amounts, tenors and guidance yields to encourage banks to take on more or less risk given economic conditions.

In 2013, for example, the bank systematically tightened money conditions through short-term operations, resulting in dramatic cash crunch in the summer that caused a near-panic in global markets as rate shot north of 30 percent.

But in 2014, as economic growth has continued to slide, Beijing has been backing off on attempts to squeeze out real estate speculation and shadow banking on concerns that minimum economic growth targets are at risk given persistent weakness in demand and staggering debt loads for Chinese companies.

The PBOC cut one-year benchmark lending rates by 40 basis points to 5.6 percent late on Friday, surprising market participants who had predicted more covert policy easing measures such as liquidity injections.

But a study of Reuters data showed the rate cut could bring little relief to smaller firms struggling with the country's most worrisome debt burdens, as lenders increasingly look to favour the strongest and most solvent companies.