China's interbank market liquidity eased again in May, local traders tell MNI
Interest rates on one-year AAA negotiable certificates of deposit (NCDs), a measure of short-term interbank lending costs, reached 2.1021% on May 27, below the PBOC’s MLF rate of 3.45%.
Abundant liquidity has led some economists to suggest any further moves by the People's Bank of China to cut banks' reserve requirement ratios could be delayed. And with Beijing planning to issue about CNY7.7 trillion of CGBs and local-government debt between May to December, expectations the PBOC could purchase treasury bonds to support an expansionary fiscal stance have increased. (See MNI: Chances Rise PBOC Cuts RRR As Gov Debt Issuance Increases)
The MNI China PBOC Policy Bias Index read 21.4 in May, indicating traders believed the central bank’s policy stance had loosened the most since June 2019.
The PBOC provided CNY125 billion in a 1-year MLF on May 15, fully offsetting the maturing volume. The central bank also drained net CNY440 billion via its open market operation as of May 28, MNI calculated.
ECONOMY UP
Industrial production rose 6.7% y/y in April, up from 4.5% y/y in March, offset by retail sales growth slowing to 2.3% y/y, 0.8pp lower than previously, with the MNI China Economy Condition Index reaching 65.5 in May, up from 57.1 and the highest since October last year.
“Industrial output growth in April was above market expectations, driven by strong exports,” a trader based in Guangdong told MNI.
Strong export growth is unlikely to be impacted by recent U.S. action to increase tariffs on Chinese products. (See: MNI INTERVIEW: U.S. Will Find Replacing China EV Parts Difficult)
RATES
The MNI China 7-Day Repo Rate Index increased to 54.8 in May, from the previous 46.4, with 33.3% of participants expecting an increase in rates and 23.8% seeing a decline.
The MNI China 10-year CGB Yield Index read 31.0, up from 28.6, with 42.9% of traders predicting the yield would fall, down from 47.6% last month.
Financial News, a PBOC affiliated news outlet, has said longer-term yields were reasonable between 2.5% to 3.0%.
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