China's currency defence takes toll on big banks, bond funds

China's strategy of defending its currency by choking local liquidity is sending ripples throughout the financial system, squeezing banks and fuelling losses at bond funds.

- Bloomberg

The People's Bank of China (PBOC) has drained cash through open market operations most days this month, supporting the yuan by making it more scarce. But that has had unintended consequences: Banks have hoarded cash rather than lend it to rivals, while debt funds have suffered losses as investors sell bonds to raise money. China's 10-year bond yield hit its highest level since December on Monday.

The latest sign of a cash crunch at Chinese banks is a sharp drop in their lending through repurchase contracts, or repo. The country's biggest banks cut their lending in the repo market by around two-thirds in mid-February compared with the daily average last year, according to people familiar with the matter.