MNI CHINA MONEY MARKET INDEX: Rate Cut Expectations Fall
Chinese interbank market traders have dialled back expectations for a near-term cut in the central bank’s policy rate as the economy improves and officials reserve policy ammunition in case of external shocks, MNI’s China Money Market Index indicated.
The PBOC’s 7-day repo rate outlook sub-index dropped to 63.6 from February’s 73.9, its first decline after four consecutive months of increases, with 72.7% of participants expecting the rate to hold steady in the coming month. The DR007 outlook sub-index, which tracks expectations for interbank repos, fell to 72.7 from 75.0, with 50% of traders expecting a lower market rate thanks to improved liquidity conditions.
China’s economy has recovered so far this year thanks to official policy moves to boost consumption and investment since last September, reducing the need for a rate cut, said a trader in Shanghai, noting policy room will likely be reserved for uncertainties. (See: MNI PBOC WATCH: Easing Takes Backseat To Relending Focus)
Meanwhile, 47.7% of respondents to MNI’s special question this month expected a continued rise in China’s 10-year government bond yield, which spiked to 1.9% from 1.6% since the middle of February.
A Jiangsu trader attributed the bond selloff to the reduction in expectations for cuts to rates and banks’ reserve requirements, as well as to the diversion of funds into a robust stock market. Bond short-selling sentiment is rising, the trader said.
The upward trend in 10-year yields could extend to May or June, taking them to 2.0%-2.1%, a Beijing trader said. Other traders said it was too early to call a bond bear market, given a low interest rate environment, and added that many investors are likely to sit out the volatility with a view to buying high-quality debt once it passes.
The People’s Bank of China would step in should yields rise in a disorderly fashion, a Shanghai trader noted.
The sub-index for current policy bias rose to 10.2, the highest this year, with a lower reading indicating an easier expected policy stance. Some 79.5% of participants thought the current policy bias was loosening, compared with 90.9% last month. (See MNI INTERVIEW: Low Inflation Gives Room For More China Easing)
Further easing over the next six months was predicted by 75% of traders, from 84.1% last month, taking the policy outlook sub-index to 12.5 from 8 in February.
But a Beijing trader said the PBOC will aim to balance growth and risk prevention, so any easing would be relatively cautious as it monitors the response to policy moves.
The sub-index covering current liquidity conditions slid to 35.2 from 73.9 last month, with 54.5% of traders reporting a clear improvement in liquidity over February, when there were distortions due to tax payments and rising liquidity demand at the end of the quarter.
PBOC liquidity injections eased concerns over tightness last month, helping short-term bond yields to edge lower, a state-owned bank trader in Henan told MNI, while a Shanxi trader noted that interbank conditions were also boosted by lower net government debt issuance.
The China liquidity outlook for the coming month sub-index rose to 45.5 from last month’s 19.3, with 63.6% of traders expecting conditions to remain similar, though 13.6% expected tightness, compared to 9.1% in February.
The sub-index covering the PBOC’s current OMOs rose to 38.6 from 13.6, with 77.3% of traders assessing open market operations as being “in line with demand”, compared with only 27.3% last month. The sub-index for the PBOC’s OMOs over the coming month outlook edged up to 46.6 from 45.5.
The survey was conducted from March 10 to March 21, with the participation of 44 traders from both state-owned and joint-venture banks.
The April press release is attached.
