Overnight rates rose higher than 7-day funds while market interest rates exceeded policy rates, a Shandong trader at a state-owned bank said, attributing tightness partly to early-year loan demand.（See:MNI PBOC WATCH: Easing Paused Ahead Of Two Sessions）
The PBOC has prioritised yuan stability at a time of strength in the dollar and U.S. Treasury yields, while equity flows fueled by enthusiasm for AI companies have also drained liquidity, a Shanghai trader said. As cash returns to the financial system following holidays, the central bank has also drained excess funds to limit unproductive financial arbitrage, a Hebei trader said.
The PBOC OMO sub-index fell to 13.6 from 22.1 last month, with 72.7% of traders assessing OMOs as being “too little.” But traders expected improvement in March after the annual “Two Sessions” policy-setting meetings.
The China liquidity outlook for the coming month sub-index fell to 19.3 from 24.4, with 70.5% of traders expecting benign conditions, while 59.1% thought the weighted average 7-day repo rates for deposit-taking institutions will edge down, with the DR007 outlook sub-index rising to 75 from 72.1. DR007 is benchmarked by the PBOC’s key 7-day repo rate.
Rising rates should be temporary as seasonal factors dissipate and fiscal funds are unlocked after the Two Sessions, a Shanxi trader said, noting the PBOC’s approach is to guide market rates close its policy rate, but not to tighten overall liquidity conditions. (See:MNI: China To Lower 2025 CPI Goal As Deflation Pressure Looms)
The current policy bias sub-index showed no traders expected a tight scenario, and the policy outlook in the next six months sub-index fell to 8.0 from 11.6, pointing to additional easing moves.
With China facing external uncertainties as well as insufficient domestic demand, policy supports are likely to intensify, and interest rates should fall, a Fujian city commercial bank trader said. The Two Sessions will bring fiscal initiatives, while U.S tariff policies should be clearer, creating more space for central bank easing, a Zhejiang trader said.
Continuing PBOC net injections via OMO were anticipated by 45.5% of participants, with the OMO outlook over the coming month index falling to 45.5 from 51.2. The PBOC’s 7-day repo rate outlook sub-index rose to 73.9 from 69.8, rising for a fourth consecutive month, and 47.7% of traders expecting a cut in the coming month, compared with 39.5% last month.
MNI’s special question this month showed 61.4% of participants thought the PBOC could cut reserve requirement ratios as soon as March. A Jilin trader predicted cuts of 100 basis points in RRR and 40-50bp in the 7-day repo rate for the whole year. The central bank’s moderate easing stance will see it deploy various tools, including reverse repos and government bond purchases, to release liquidity, the trader said. (See:MNI INTERVIEW: Call For PBOC To Boost Support For Stock Market)
The PBOC bond trade outlook over the coming month index showed half of participants thought the central bank will restart purchases.
Government bond issuance should accelerate after the Two Sessions, and the PBOC will strengthen its purchases to limit volatility, the Shanghai trader said. A Jiangsu trader saw the 10-year treasury yield, now 1.77%, fluctuating in a range of 1.55% to 1.9%.
The survey of 44 traders from both state-owned and joint-venture banks was conducted from Feb 10 to Feb 21.
The press release for the February release is attached: