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Liquidity In Focus

CHINA RATES

The PBOC conducted net drains of CNY 10bn today, the overnight repo rate is slightly higher, last up 3.7bps at 2.1574% and some 75bps higher than lows last week. The 7-day repo rate spiked to 2.60%, but has since fallen to 2.1741%.

  • There is an argument that the PBOC will have to step up liquidity operations, especially given large drains in January and lack of injections around LNY. So far in 2021 the bank has drained a total CNY 535bn from the banking sector, while tax payments will have also impacted liquidity.
  • Bank loans were up around CNY 3.6tn in January which analysts estimate has taken up around CNY 300bn of the banking sectors cash buffer, MLF operations are due to mature later in March which will drain another CNY 100bn
  • Given the vastly reduced state of liquidity, and preference from the PBOC to avoid the perception of a tightening bias, liquidity operations could increase in the coming weeks, especially heading into month/quarter end in a bid to avoid a spike in rates seen in January.
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