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The People’s Bank of China is signalling curbs on rising leverage in the wholesale money market by draining excess liquidity as social financing improves on fiscal stimulus and credit expansion efforts, market analysts said.
The central bank has reduced the amount of its daily open market operations at an unexpected pace since this Monday by injecting only CNY3billion per day via reverse repo agreements.
This is the first time that the daily OMO injection was lower than CNY10 billion since the end of January 2021. As a result, the PBOC has mopped up a total of CNY378 billion from the interbank market so far this week.
The surprisingly “tiny OMO” spooked bond investors concerned the move is a signal for a fine-tuning of the policy stance which has tolerated money market rates much lower than the OMO rates in the past three months. (See MNI: Warnings As China Interbank Liquidity Feast Bill Near Due)
As a result, bond yield curves became flatter as short-term yields rise at a faster pace than long-term yields. The 1-year CGB yield lifted by 3bps to 2.01% on Tuesday, the highest since the middle of June, while the 10-year CGB fell by 1bp at the same period. Analysts predicted the bond yield curve would continue to flatten in the rest of the year.
Ming Ming, chief economist at CITIC Securities, said the consecutive tiny amount of OMOs indicated the monetary policy may start to turn to “normal easing” from a “crisis-dealing” pattern.
The need of keeping money market rates at an excessively low level has reduced as the economy shows an upward trajectory and inflation concerns rise on a higher pork price, Ming said. He predicted the seven-day repo rate for deposit institutions would swing in a range of 1.8% to 2% this month, from currently around 1.6%.
If the PBOC continues its CNY3 billion daily OMO injections, a total of CNY435 billion liquidity would be drained from the interbank market in the first half of July, and the yield of 10-year CGB may jump by as much as 10bps, Ming said, warning that the rise of money market rates may pressure China’s equity market.
Liu Yu, analyst at GF Securities, noted the central bank is dragging up money market rates approaching the relative OMO policy rates as a warning to the carry trade betting on continuously loose policy.
The wholesale money market has seen a rapid rise in leverage since May and the trade volume of repo agreements has reached a record CNY6.4 trillion by the end of June. According to Liu, the leverage ratio in bond market rose to 110.2% on July 1, the highest this year.
However, liquidity conditions are not seen as deteriorating on the PBOC moves as rates remain at a low level, thanks to the large fiscal spending and soft credit demand in previous months.
Analysts estimated the liquidity situation in July is stable due to less issuance of local government debt and the PBOC would not turn to tighten at a sharp pace since it needs to coordinate with fiscal stimulus to boost the economy in the second half.
An improving credit situation has also made excess liquidity in the interbank market less necessary.
According to Bank of China, the total social financing is expected to grow as high as 10.5% for the whole year, compared with 10.3% in 2021, and will edge up in the coming months as a package of stimulus policies planned by State Council is launched to boost credit demand.
The effort uses targeted credit tools of the PBOC to support key sectors, such as small businesses, green projects, and high-tech innovation, and is expected to boost credit expansion in those sectors by over 20% for the year.
In addition, the central bank has muscled its policy banks to boost credit when commercial banks are reluctant to lend. After granting an additional CNY800 billion credit quotas for the three policy banks in June, the PBOC asked them early this month to issue bonds and raise CNY300 billion for infrastructure projects.
According to Guotai Junan Securities, the CNY300 billion, which can be used as equity capital of projects, would leverage as much as CNY1.2 trillion funds, and is expected to push up GDP by 0.2-0.3 percentage points and TSF by 0.1pps to around 10.8% for the whole year.
The PBOC will release June money supply data as early as next Monday, for which Liao Zhiming, analyst at China Merchants Securities, said the outstanding TSF would expand by 10.6% from 10.5% in May with new loans growing to CNY2.5 trillion from CNY1.89 trillion in May. M2 would increase by 11.2% in June, compared with 11.1% in May, he said.
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