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PBOC Seen Raising Money Rates Twice in 2017 to Cut Leverage

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  • PBOC Seen Raising Money Rates Twice in 2017 to Cut Leverage

China’s central bank will keep a tight rein on money-market rates this year, raising the cost of short-term funds at least twice in moves that will pressure bonds.

That’s the consensus view in a survey of 29 fixed-income traders and analysts, with 20 saying that the People’s Bank of China will increase open-market operation rates by 10 basis points in the second quarter itself. Government bonds will decline for the third quarter in a row in the April-June period, according to the March 24-27 poll. That would be the longest run of losses in six years.

China’s policy makers are walking a fine line between driving money rates higher to reduce leverage in the financial system and preventing a cash crunch. They have already raised the cost of reverse-repurchase agreements twice this year, while benchmark interest rates have been on hold since 2015. A separate survey predicted that the PBOC will keep both benchmark borrowing costs and bank reserve-requirement ratios unchanged throughout the year.

“China is far from the end of efforts to squeeze out bubbles in the financial system,” said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking Group Ltd. “The PBOC will to some extent follow the Federal Reserve in tightening to keep the rate gap largely steady.”

The overnight repo rate on the Shanghai Stock Exchange jumped as much as 21.67 percentage points to 32 percent, the highest level since Dec. 27. The benchmark Shanghai Composite Index declined 1 percent.

The PBOC kicked off its latest tightening cycle in August after broad monetary loosening helped fuel an unprecedented, 11-quarter bond rally. The central bank resorted to injecting longer-term funds in open-market operations, and raising the cost of loans to commercial lenders. On March 16, while explaining the rationale for its latest open-market borrowing cost increase after a Fed hike, the PBOC said higher rates would help offset a drop in real interest rates and maintain a yield advantage over the U.S.

Taming Credit

PBOC Governor Zhou Xiaochuan told reporters during the National People’s Congress earlier this month that taming the credit binge will be a “medium-term process.” At the Boao forum held over the weekend, he said one of the priorities in China’s structural reforms in the short- and medium-term is lowering leverage.

“The funding market will become more volatile in the second quarter and there will be more frequent hiccups,” said Yan Yan, the Shanghai-based head of fixed income trading at China Guangfa Bank Co. “The pivotal level of funding costs will rise further.”

The survey’s results suggest that:

  • The seven-day repurchase rate, a gauge of interbank funding availability, will average 2.70 percent in the April-June period, compared with 2.61 percent so far this year. The rate closed at 2.81 percent on Thursday.
  • The 10-year sovereign bond yield will end the second quarter at 3.4 percent, according to the median estimate. That compares with a yield of 3.27 percent on Wednesday.
  • Nine respondents forecast that the sovereign yield curve will bear steepen, while eight expect rangebound trade and seven see a bear flattening.
  • The PBOC will boost the costs of funds offered in reverse-repurchase operations, according to all but two of the 29 respondents.
  • The credit premium of five-year AA grade corporate bonds over top-rated peers will widen by as much as 50 basis points, according to 18 respondents. The gap was last at 49 basis points, the narrowest since at least 2010.
  • The participants in the Bloomberg survey included China Guangfa Bank Co., Hengfeng Bank Co., Genial Flow Asset Management Co., Mao Dian Asset Management, JD Finance, Tebon Securities Co., SDIC Essence Futures Co. and Nanhua Futures Co. Twenty-one traders and analysts asked not to be identified as they are not allowed to comment on the matter publicly.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

South Africa’s iGas, PetroSA and Strategic Fuel Fund Merge to Create South African National Petroleum Company

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The South African Department of Mineral Resources and Energy (DMRE) has announced the merger of Central Energy Fund (CEF) subsidiaries iGas, PetroSA and the Strategic Fuel Fund (SFF).

The merger will be effective from 1 April 2021 and the new company will be called the South African National Petroleum Company.

The merger, driven by the pursuit of implementing a new company that has a streamlined operating model via the development of a shared services system and a common information platform, comes a few months after cabinet approval and the confirmation that PetroSA had incurred losses of R20 billion since 2014.

Additional factors which prompted the move included the determination to strengthen PetroSA which had not had a permanent CEO in five years prior to the appointment of CEO Ishmael Poolo last and, had become majorly ungainful since its failure to secure gas for the gas-to-liquids refinery project in Mossel Bay.

While the merger deadline has been set, the portfolio committee expressed reservations to the department’s likelihood of meeting the deadline, considering the existing legislative regime, pending issues raised in the SFF and PetroSA forensic reports, as well as PetroSA’s current insolvency and liquidity challenges, the official press statement on the briefing revealed.

“South Africa’s energy sector is entering a new dawn,” said NJ Ayuk, Executive Chairman of the African Energy Chamber. “With gas discoveries off the coast and the announcement of the REIPPP programme bid window 5 and 6 on the horizon, now is the most opportune time for the merger of the CEF subsidiaries. Of course, it is not an easy task and delays may be anticipated but, this move signals a real change towards a meaningful strategy that will not only be beneficial to the DMRE but to potential investors and local development as well.”

The African Energy Chamber welcomes this move and acknowledges that this is yet another step supporting the country’s determination to restarting the engines of sustainable growth and the transformation of energy policy and infrastructure.

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Crude Oil

Crude Oil Hits $71.34 After Saudi Largest Oil Facilities Were Attacked

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Brent Crude Oil Rises to $71.34 Following Missile Attack on Saudi Largest Oil Facilities

Brent crude, against which Nigerian oil is priced, jumped to $71.34 a barrel on Monday during the Asian trading session following a report that Saudi Arabia’s largest oil facilities were attacked by missiles and drones fired on Sunday by Houthi military in Yemen.

On Monday, the Saudi energy ministry said one of the world’s largest offshore oil loading facilities at Ras Tanura was attacked and a ballistic missile targeted Saudi Aramco facilities.

One of the petroleum tank areas at the Ras Tanura Port in the Eastern Region, one of the largest oil ports in the world, was attacked this morning by a drone, coming from the sea,” the ministry said in a statement released by the official Saudi Press Agency.

It also stated that shrapnel from a ballistic missile dropped near Aramco’s residential compound in Eastern Dhahran.

Such acts of sabotage do not only target the Kingdom of Saudi Arabia, but also the security and stability of energy supplies to the world, and therefore, the global economy,” a ministry spokesman said in a statement on state media.

Oil price surged because the market interpreted the occurrence as supply sabotage given Saudi is the largest OPEC producer. A decline in supply is positive for the oil industry.

However, Brent crude oil pulled back to $69.49 per barrel at 12:34 pm Nigerian time because of the $1.9 trillion stimulus packed passed in the U.S.

Market experts are projecting that the stimulus will boost the United States economy and support U.S crude oil producers in the near-term, this they expect to boost crude oil production from share and disrupt OPEC strategy.

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Crude Oil

A Loud Blast Heard in Dhahran, Saudi Arabia’s Largest Crude Oil Production Site

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Loud Blast Heard in Dhahran, Saudi Arabia’s Largest Crude Oil Production Site

Two residents from the eastern city of Dhahran, Saudi Arabia, on Sunday said they heard a loud blast, but they are yet to know the cause, according to a Reuters report.

Saudi’s Eastern province is home to the kingdom’s largest crude oil production and export facilities of Saudi Aramco.

A blast in any of the facilities in that region could hurt global oil supplies and bolster oil prices above $70 per barrel in the first half of the year.

One of the residents said the explosion took place around 8:30 pm Saudi time while the other resident claimed the time was around 8:00 pm.

However, Saudi authorities are yet to confirm or respond to the story.

 

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