The USD/CNY market is experiencing turbulence due to surging repo rates. The primary reason behind this spike is the increased liquidity demand during the tax payment period. The People’s Bank of China (PBoC) has provided limited funding, further tightening liquidity conditions.
On January 16, the liquidity strain intensified, with DR007 and R007 reaching 2.34% and 4.19%, respectively. This sharp rise followed the tax payment deadline, reflecting the market’s struggle to secure enough funds. The PBoC’s approach to maintaining exchange rate stability has exacerbated the Renminbi (RMB) liquidity crunch in offshore markets.
To manage liquidity, the PBoC issued RMB60 billion in six-month bills in Hong Kong on January 9. This issuance was significantly larger than previous ones. Moreover, the coupon rate of 3.4% exceeded December’s level, highlighting the persistent tightness in CNH liquidity. Additionally, investor demand has remained subdued, putting further strain on the forex market.
In December, China’s FX settlement balance fell into a deficit of $10.5 billion, the first since July 2024. A notable factor was the increased demand for USD in service trade transactions. Domestic importers also contributed to this trend by actively purchasing USD through FX forward contracts. These actions aimed to hedge against tariff risks, causing upward pressure on forward points.
On January 13, the PBoC raised the cross-border macroprudential parameter from 1.50 to 1.75. This adjustment allows domestic corporations and financial institutions to expand cross-border borrowing. Despite this move, analysts believe the PBoC’s decision serves more as a symbolic effort to stabilize FX market expectations rather than a fundamental liquidity boost.
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USD/CNY repo rates surged due to tight liquidity during tax payments. Learn how PBoC’s policies impact FX markets and investor expectations.
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