MNI CHINA MONEY MARKET INDEX: Easing Expectations Fall For H2

Chinese interbank money market traders saw a lower chance of further central bank easing in the second half of the year and expressed concern over marginal tightness in liquidity next month after recent cuts to policy rates and the reserve requirement ratio, MNI’s China Money Market Index indicated on Wednesday. 

Falling bets on further monetary loosening and an improved risk appetite after the China-U.S meeting in Geneva have pushed up long-dated government bond yields, traders told MNI. (See MNI PBOC WATCH: Further Easing On Hold As Economy Stablises)

Further easing over the next six months was predicted by 67.4% of traders, the lowest this year though above the 50% threshold, taking the policy outlook sub-index to 16.3, the highest since December. 

Traders think narrow net interest margins will restrain the pace of People’s Bank of China rate cuts. A trader from Zhejiang Province said reductions in interest rates on deposits after the Loan Prime Rate was cut would help banks, but a Shanghai trader noted that deposits may shift from large banks to smaller ones, which can be slower to adjust rates, or even into wealth management products or bond funds. 

The PBOC’s 7-day reverse repo rate outlook sub-index fell to 57.6, with 84.8% of participants expecting a steady policy rate in the coming month. Some 78.3% thought the 7-day reverse repo rate for deposit-taking institutions (DR007) will also remain stable next month, with the sub-index rising to 60.9 from 60.0. DR007 is benchmarked by the PBOC’s key 7-day reverse repo rate.

The sub-index of policy bias saw little change at 13.0 from last month’s 13.3, but was the second highest since December (the lower it reads, the easier the expected policy stance) with 73.9% of participants foreseeing an easing stance. 

MNI’s special question for May showed the positive result of China-U.S Geneva talks boosted market sentiment even though participants think the impact on the monetary stance is still unclear. (See MNI: China Sees 10% Tariffs As Realistic, May Offer UST Deal)

A Guangdong trader said the PBOC is likely to remain cautious with regards to major easing but is keeping liquidity ample while trade uncertainties persist. A Shandong trader said a reduction in trade tensions had reduced demand for safe-haven assets, and that the central bank may scale back easing measures should economic recovery exceed expectations. 

Another special question showed the CGB yield curve steepened after recent policy easing. The Shanghai trader said short-term yields are more sensitive to liquidity conditions, and that the central bank will continue to guide the yield curve to slope upwards. 

The China liquidity outlook sub-index rose to 51.1 from last month’s 45.6, its first time above 50 this year, indicating possible marginal shortage in liquidity next month, with 30.4% of traders saying the PBOC would drain liquidity in its open market operations, compared with only 20% last month. The overall sub-index for the OMO outlook rose to 51.1, the highest since January.

A Henan trader said liquidity could be affected next month by tax payment season and increased mid-year liquidity demand. 

The sub-index covering current liquidity conditions fell to 25.0 from 25.6, with 56.5% of participants seeing loosening liquidity. This was in line with MMI survey results in April.

The Shandong trader said liquidity conditions remain relatively loose this month, with only brief tightening as the PBOC deployed a CNY500 billion medium-term lending facility operation.

The sub-index covering the PBOC’s current open market operations rose to 46.7 from 43.3, with 93.5% of traders assessing OMOs as being “in line with demand”

The PBOC bond trade outlook sub-index edged down to 35.9 from 37.8, with 43.5% of traders expecting the central bank to increase bond holdings. The Bank has used its outright reverse repurchase operations to trade bonds after pausing direct bond trading since January. 

The MNI China Money Market Index (MMI) survey was conducted from May 12 to May 23,  with participation of 46 traders from both state-owned and joint-venture banks. 

The full press release is here. Please contact sales@marketnews.com for historical time series.
MNI China Liquidity Index May Presser 2025.pdf