Cash withdrawals ahead of the Chinese Spring Festival starting Jan 28 weighed on the market, a Henan trader told MNI, while the small scale of the PBOC’s open market operations, which even allowed a net drain in the first week of the month, added to the pressure.
The weighted average 7-day repo rates for deposit-taking institutions (DR007) consistently stayed above 1.9% in the second week of January, with the 7-day repo rate for non-banking institutions (R007) briefly exceeding 4%, while the overnight repo rates for deposit-taking institutions (DR001) surpassed 8%, a Shandong trader noted.
The PBOC OMO sub-index rose to 22.1 from 12.8, with 55.8% of traders assessing OMOs as being “too little.”
With monetary policy focussing on the exchange rate and bond market stability, interbank liquidity has inevitably tightened, a Beijing trader said. (See:MNI: PBOC To Ensure Yuan Stability In Trump's Second Term)
MNI’s special question this month showed 30.2% of participants were concerned the PBOC’s suspension of bond purchases would push up treasury yields and squeeze liquidity.
A Hebei trader said the suspension indicated the Bank intends to prevent a drop in treasury yields, as secondary-market bond-trading has become a tool for providing base money, allowing for more flexible liquidity adjustments and even gradually replacing the MLF.
The suspension has already sent a strong regulatory signal, halting the decline in yields, and helped stabilise the yuan by preventing the China-U.S interest spread from further widening, said a Shanghai-based trader. But a Shanxi trader said the overall direction of the bond bull market may be hard to reverse with the PBOC’s current stance, with scope for any rise in yields limited.
However, survey participants still believed the Bank has not abandoned its easing stance, with the current policy bias sub-index continuing to fall to a record-low 3.5 from December’s 7.0 (the lower it reads, the easier the expected policy stance), with 93% of participants describing the current policy bias as towards loosening. (See:MNI: PBOC To Make Q1 Cut After Stance Shift-Former Officials)
Further easing over the next six months was predicted by 76.7% of traders, from 41.9% last month, taking the policy outlook sub-index to 11.6 from 29.1 in December, with a Hebei trader anticipating both interest rate and reserve requirement ratio cuts this year.
“The timing may be brought forward to address potential tariff shocks following Trump's inauguration,” he continued.
Another special question showed 76.7% traders betting on cuts to reserve requirements and rates soon. A Zhenjiang trader said real interest rates were still high, and fiscal efforts also required a low-interest-rate environment. (See: MNI: PBOC To Expand Tools, Cut RRR As Fresh Bonds Hit Market)
The PBOC’s 7-day repo rate outlook sub-index rose to 69.8 from December’s 60.5, with 39.5% of participants expecting a cut in the coming month, compared with 20.9% last month. Some 55.8% thought DR007 will edge down next month, with the DR007 outlook sub-index rising to 72.1 from 48.8. DR007 is benchmarked by the PBOC’s key 7-day repo rate.
The China liquidity outlook for the coming month sub-index fell to 24.4 from 36.0, with 65.1% of traders expecting the situation to improve after the Chinese New Year holiday. The sub-index for PBOC OMOs over the coming month rose to 51.2 from 47.7.
The survey of 43 traders from both state-owned and joint-venture banks was conducted from Jan 6 to Jan 17.
The press release for the January 2025 release is here: