SHANGHAI/SINGAPORE - China's attempts to keep the yuan from falling contributed to last week's chaos in money markets, sources involved say, pointing to the pressure behind the scenes as Beijing tries to guide its economy and markets through a major slowdown.
The contributing factors were the usual month-end demand for liquidity, cash hoarding in the lead up to a big government bond sale and a market where the biggest banks were already reticent to lend because of a mandate to counter pressure on the yuan. They affect foreign exchange movements since the markets are the major avenue for the supply of money.
"The inaction by the central bank is mainly due to its concern over yuan depreciation," said the fund manager, who declined to be identified as he was not authorised to talk to media.Even repo rates between banks, normally stable and the main gauge of short-term funding costs, flew from an overnight rate of 2% a day earlier to as high as 8% on Oct. 31.At 4 p.m. the state banks that normally lend to desperate last-minute borrowers were missing, according to three market participants.