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PBOC cuts funding cost to quell liquidity concerns

PBOC cuts funding cost to quell liquidity concerns

The People's Bank of China has cut the cost of one-year funds to banks for the first time in three years in order to reduce tensions associated with contracting liquidity amid the undergoing slowdown in the economy.

The central bank has injected 400 billion yuan and reduced interest rates for medium-term loans from 3.3 percent to 3.25 percent. It also facilitated borrowing measures and replaced injections with 403.5 billion yuan of loans due on Tuesday.

However, such a slash is not a direct reduction in borrowing costs within the Chinese economy, but it reflects the central bank's approach to stimulus instruments amid fears of rising debt and inflation, prompting traders to sell Chinese bonds last October due to concerns about the current stance.

The 10-year sovereign yield rose to its highest level since May last week, and in October it reached a six-month high.

On the contrary, the Chinese governmental bond yields for 10 years maturity slumped by two basis points to 3.276 percent  on Tuesday, wiping out earlier gains. Debt futures rose as much as 0.35% to the highest level in more than a week.

The PBOC set the exchange rate of the yuan against the US dollar at 7.0385, while it was set during yesterday's session at 7.0305.

The U.S. dollar index retreated to 97.31 after hitting a top at 97.45, ahead of U.S. ISM non-manufacturing PMI due later in the day.

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