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Another Liquidity Drain

CHINA

China experienced a mini taper tantrum yesterday as bonds sold off after the PBOC unexpectedly drained CNY 78bn of liquidity via OMO's. The bank has drained a further CNY 100bn today, and CNY 250bn are scheduled to roll off tomorrow.

  • Interbank borrowing costs have soared, with overnight repos jumping to the highest since October 2019. The overnight repo rate remains above the 7-day rate.
  • Comments from PBOC advisor Ma Jun were also cited as rationale for the move, he warned he saw bubbles in stocks and real estate. PBOC Governor Yi Gang has sought to reassure markets and said after the close that the PBOC would exit easy monetary policy early.
  • USD/CNH last down 4 pips at 6.4722, holding declines yesterday as markets assess the efficacy of comments from the PBOC Governor amid signs of tacit tightening. While these drains are historically not outside of ranges, their proximity to LNY – when PBOC usually adds liquidity – is giving markets something to think about.
  • Market will look now to industrial profit data due at 0130GMT/1030HKT. The figure could rise thanks to a low base effect and robust industrial production/exports data.

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