CHINA: Liquidity Crunch in China’s Interbank, No Easy Solutions
Jan-16 04:59
- A sharp funding squeeze for China’s domestic banks is pushing short term funding rates to extreme levels with the 7-day interbank pledged repo index rising to the highest it has been in over a year.
- Yesterday, as markets headed into the close, the CCDC delayed clearing by ten minutes as settlement failures wreaked havoc in the interbank market with the increase in borrowing costs.
- Yesterday’s open market operations saw net CNY954bn injected in what appeared to be a straightforward injection leading into the Lunar New Year period, according to local media.
- However the reality is that funding is very challenging at present for banks as retail investors prefer to park their cash in the bond market, in lieu of bank deposits.
- The PBOC in recent weeks has been defending the currency arguably at a time when it could have been softening the pressures in the interbank market.
- This week’s funding squeeze is a potential early warning that yesterday’s large injection may need to be the first of many as Lunar New Year, Tax Time and bond demand withdraws cash from the system.
- The rise in the interbank rate prompted officials to recognize that currency stability is not their only priority and at a press conference late on Tuesday indicated that: ‘ their goal was to keep the currency stable, whilst taking steps to maintain liquidity in they system.’
- Some market commentators are suggesting that as liquidity and funding pressures are rising so rapidly into the holidays, the PBOC may be forced to cut the RRR in the near term as a measure to support the liquidity in the system. Onshore media commentary has noted that recent liquidity injections are the equivalent of a 0.5ppt RRR cut.
- Whilst this appears to be an easy fix, it could fuel further investment into a very hot bond market creating bubbles - something that the Central Bank would appear unlikely to want.
- Easier policy settings may bias the yuan softer, all else equal, highlighting the difficult policy juggling act the authorities have at the moment.
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
ASIA FX: China To Target 5% Growth In 2025, Budget Deficit of 4% Of GDP - RTRS
Dec-17 04:55
Headlines have crossed from Rtrs stating that China is expected to target economic growth around 5% in 2025. The budget deficit is expected to widen to a record 4% of GDP, versus this year's initial target of 3% of GDP.
- Reuters notes: "The additional one percentage point of GDP in spending amounts to about 1.3 trillion yuan ($179.4 billion). More stimulus will be funded through issuing off-budget special bonds."
- "These targets are usually not announced officially until an annual parliament meeting in March. They could still change before the legislative session."
- "The stronger fiscal impulse planned for next year forms part of China's preparations to counter the impact of an expected increase in U.S. tariffs on Chinese imports as Donald Trump returns to the White House in January."
BONDS: ACGB Curve Steepens Following Weak Consumer Confidence
Dec-17 04:54
Aussie bonds saw a bull-steepening move occur following the worsening of WBC Consumer confidence data earlier, dropping 2% for December to 92.8 points, following a gain of 5.3% in the previous month.
- Australia's consumer confidence fell 2% in December to 92.8, as persistent inflation, high interest rates, and global uncertainties dampened sentiment, according to a Westpac survey. Confidence in the economic outlook weakened sharply, with the 12m and 5yr expectations sub-indexes dropping 9.6% and 7.9%, respectively. Housing sentiment also deteriorated, with the "time to buy a dwelling" index falling 6% amid softer price expectations. The decline comes despite the RBA signaling progress on inflation and a surprise fall in unemployment to 3.9%.
- ACGBs have traded richer today, the curve has bull-steepened with the 2s10s is 39.25 although off earlier highs of 41. The 2yr is trading -2.2bps at 3.892%, the 3yr is outperforming today -2.5bps at 3.838%, while the 10yr is -1.9bps at 4.295%.
- ACGB futures are currently YM +2.8, VTA +1.8, XM +2.3
- Swap curves have flattened, better buying occurring through the belly of curve, last -2bps to -4bps
- Bill strip is +5 to +3, front -end outperforming.
- RBA-dated OIS pricing is little changed today for the Feb meeting, with 14bps of cuts price, pricing has firmed for an April cut with 28.5bps currently priced, up from 22.5bps on Monday morning. Looking out to November 2025 the market is currently pricing in 76bps of cumulative cuts
- Tomorrow, we have Westpac Leading Index, although this is expected to have little impact on the market, there is little else on the calendar for the rest of the year, however the RBA minutes are out on the 20th
CHINA: Market Growth Expectations Not Rising Despite Stimulus Efforts
Dec-17 04:40
Following yesterday's China data outcomes, the Citi China economic surprise index has ticked lower. The surprise index had a strong run higher through Oct/Nov of this year, see the chart below. The other lines on the chart are the markets consensus GDP forecast for 2024 and 2025 (sourced from Bloomberg). The consensus expectations haven't shifted in recent month despite the better data outcomes relative to market expectations.
Fig 1: Citi China EASI & 2024 and 2025 GDP Growth Expectations
Source: Citi/MNI - Market News/Bloomberg
- Broader market skepticism/concern around China stimulus efforts (which have aided data outcomes at the margins) to boost the growth outlook is likely helping keep growth forecasts steady. Stimulus measures have been steady rather than a big bang stimulus, which the authorities still appear to be wary of.
- China’s Political Bureau of the CPC Central Committee held a meeting on December 9, resetting the tone for monetary policy to ‘moderately loose’ from ‘prudent’.
- Historically this tone has only been used when there is pressure to stabilize domestic prices and the Federal Reserve is in an easing cycle, both of which are, in the opinion of the committee, likely to exist next year.
- As usual with the output from these meetings, it is about setting the tone, not the execution of the policy.
- Still, onshore media is stressing the need to speed up economic policy implementation (see this link). At the same time, the Economic Daily has reinforced the need for certainty around meeting economic targets to stabilize broader economic conditions (see this link). An actual growth target for next year wasn't specified though.
- Such a backdrop suggests further policy support is on the way, with RRR and rate cuts to potentially feature early in 2025. This could leave local bonds the best expression for the mix of policy support/growth concern that the market may see.
- The China currency may also depreciate, particularly if the tariff threat is realized, but the pace of depreciation is still likely to be managed. For local equities, the authorities have introduced support via the PBoC swap facility, which may curb downside risks for the major benchmark indices.
- The second chart plots the J.P. Morgan Growth forecast revision index for China (FRI), against the 10yr government bond yield. Until growth expectations move materially higher, the market may feel comfortable expecting lower yields.
- The main risk at this stage is likely to be the pace of bond yield falls prompts intervention/jaw boning from the authorities, but this is unlikely to change the yield trend over the longer term.
Fig 2: J.P. Morgan China Forecast Revision Index & 10yr CGB Yield
Source: Citi/MNI - Market News/Bloomberg
