J.P. note that today’s PBoC inaction re: MLF rates was “due to a rapid change in U.S.-China interest rate differentials and a reversal in portfolio flow dynamics in recent months. 10-Year U.S. Tsy yields moved up from 1.73% in early March to 2.83% on April 14, reversing the interest rate differentials with 10-Year CGB yields (2.79% in early March and 2.76% on April 14). Meanwhile, portfolio outflow pressure has intensified in recent months. According to China Bond Statistics, foreign holdings of China’s bonds posted a record outflow of US$10.5bn in February, and the outflow further widened to US$15.4bn in March. Equity outflows also picked up, in part attributable to geopolitical tensions and regulatory risks, with Northbound Connect posting equity net outflows of US$7.1bn in March. The equity outflow pressure might be temporary, but bond outflow pressure may be sustained, given the changing dynamics of interest rate differentials. Even though China’s monetary policy is mainly domestic-oriented, rapid changes in the external environment and capital outflows tend to impose constraints on the PBoC’s policy operations.”

• “We do not think today’s rate decision rules out the possibility of rate cuts in the coming months. We maintain our forecast of a 10bp rate cut in Q2. But today’s announcement does confirm that the room for rate cuts is very limited, and the PBOC likely will prefer to use RRR cuts and targeted policy instruments (e.g., re-lending facilities).”
• They “expect a 50bp RRR cut within days,” given the well-documented guidance from State Council on the matter.