The PBOC’s 7-day repo rate outlook sub-index rose to 60.5, with 20.9% of participants expecting a cut in the coming month, compared with 4.7% in November. Some 14% thought the 7-day repo rate for deposit-taking institutions (DR007) will edge down next month, with the sub-index rising to 48.8 from 41.9. DR007 is benchmarked by the PBOC’s key 7-day repo rate.
Expectations for policy easing have sent bond markets surging, with the 10-year CGB yield dropping to a record low 1.7%, compared with 4.4% for U.S. Treasuries.
MNI’s special question for December showed 27.9% of participants expected the yield would continue to fall and 53.5% said it would stay between 1.7% to 1.8%, with a Zhejiang trader seeing a possible decline below 1.5%. A Shanghai trader said the central bank would increase government bond purchases, pushing short-term yields down.
The PBOC bond trade outlook sub-index slipped to 31.4 from 39.5, with 41.9% of traders expecting the central bank to increase bond holdings.
Another special question showed a weaker yuan would constrain but not alter the PBOC’s easing bias. Expectations for yuan depreciation will make the PBOC more cautious about cutting rates, though the main brake on monetary policy remains concerns about bank profitability given the difficulty for lenders to reduce deposit rates in a competitive market, a Zhejiang trader said. Caution over rate cuts could prompt the PBOC to ease using other tools, a Fujian trader said.
A trader at a state-owned bank told MNI the central bank was likely to increase liquidity injections and cut reserve requirements this month. A trader from Shandong agreed with the likelihood of an RRR cut, given weak economic data.
The sub-index covering current liquidity conditions jumped to 86.0 from 32.6 last month, with 72.1% of participants seeing tightening liquidity and no one reporting loosening. The tightness was in line with MMI survey results in November, predicting seasonal fund demand and large medium-term lending facility maturities. (See:MNI CHINA MONEY MARKET INDEX: Traders See Tight Dec Liquidity)
The sub-index covering the PBOC’s current open market operations fell to 12.8 from 40.7, with 74.4% of traders assessing OMOs as being “too little.”
Both overnight and 7-day repo rates for deposit-taking institutions have risen, after several days of net liquidity draining by the PBOC, a Hebei Province trader said.
But the China liquidity outlook sub-index fell to 36.0 from last month’s 53.5, with 30.2% of traders saying the PBOC would increase injections compared with only 16.3% last month, helping the overall sub-index for the OMO outlook to fall to 47.7.
However, some 44.2% of participants foresaw tight liquidity conditions continuing next month due to cash demand for the one-week Chinese New Year Holiday which kicks off Jan 28, and 25.6% thought the PBOC would continue to drain liquidity.
The MNI China Money Market Index (MMI), formerly the MNI China Liquidity Index, has been adapted to reflect the PBOC's monetary policy. The survey was conducted from Dec 2 to Dec 13, with participation of 43 traders from both state-owned and joint-venture banks.
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