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PBC treasury deposit yields tumble

By Qiu Chen  (Global Times)

07:12, May 31, 2012

The People's Bank of China (PBC) auctioned 60 billion yuan ($9.44 billion) worth of nine-month treasury deposits at commercial banks on behalf of the Ministry of Finance at a yield of 4.22 percent Tuesday, the lowest rate since September 2010, according to notes on the PBC's website.

Compared with statistics from over the past two years, the recent yield drop is substantial and marks the first time the rate has fallen below the Shanghai Interbank Offered Rate (SHIBOR) since August 2009. In March and February of this year, the yield on six-month deposits remained at 6.8 percent, after hitting a record high of 6.83 percent in October 2011.

The decrease in treasury deposit yields can be blamed on a lack of demand for financing and sufficient interbank liquidity thanks to the reserve requirement ratio cut which took place on May 18, Lu Zhengwei, chief economist with Shanghai-based Industrial Bank, told the Global Times Wednesday.

"Treasury deposits are usually used by banks to meet the 75 percent loan-to-deposit ratio required by the central bank. However, with abundant liquidity and a dip in credit demand, commercial banks are finding it easier to meet that target, which makes them less interested in auctioning treasury deposits," Lu said.

However, the room for further downward movement in the yield rate is limited as long as the loan-to-deposit ratio stays high, according to Lu.

"Once credit demand rebounds with the government's stimulus policies, commercial banks will again turn to treasury deposits to supplement their deposit accounts," Lu said.

Zhou Hao, a market analyst from ANZ China, predicts the yield for treasury deposits has more or less bottomed out for the foreseeable future with the benchmark interbank lending rate at its lowest point since April 2011. According to the National Interbank Funding Center, the benchmark seven-day repurchase rate was at 2.33 percent Wednesday, well below the 2.8 percent rate seen in Tuesday's 28-day repurchase agreement from the PBC.

"The seven-day rate generally remains close to the 28-day repo rate, otherwise there would be room for banks to profit from interest rate arbitrage," Zhou said. "Given that the seven-day rate is about 0.5 percent lower than the 28-day repo rate, I think the benchmark interbank lending rate has hit bottom, and thus the yield for treasury deposits is expected to move upwards accordingly."

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