MNI: PBOC Liquidity Injection Ahead As Gov Debt Issuance Booms

Increases in liquidity injections are expected from the People’s Bank of China in the next few months as the government accelerates debt issuance to shore up the economy, which would boost China’s aggregate financing and M2, according to market analysts and economists.

The total liquidity gap in June would be around CNY600 billion, as bond issuance from both central and local governments is expected to reach as much as CNY1.4 trillion, compared with CNY391.2 billion in April, said Liu Yu, an analyst at Guangfa Securities.

Liu estimates the PBOC could increase liquidity injections for medium-term lending facilities next week and restart the 14-day reverse repo in its open market operations to fill the gap.

OTHER DEBT

In addition to the planed debt quota, it is expected the country would launch trillions of special treasury bonds, and frontload the quota of local government special bonds for 2023, in a bid to raise fund for economic recovery, which both need further monetary easing.

Zhong Zhengsheng, an economist with Piegan Securities, said the central government would issue as much as CNY1.4 trillion of special treasury bonds in the third quarter to support big infrastructure projects. The country issued CNY1 trillion of special treasury bonds in 2020 to counter the initial Covid-19 blow.

MORE CUTS

The scale of debt issuance leaves room for the PBOC to further cut the reserve requirement ratio (RRR) at a moderate pace and lower policy rates to ensure an ample liquidity environment and reduce lenders’ cost, analysts said.

Ming Ming, chief economist at CITIC Securities, estimated the central bank would cut the RRR once or twice by 25 basis points to 50 basis points in the rest of the year to meet the requirement of expanding credit and unlocking medium and long-term liquidity.

The possible timing for a RRR cut, Ming predicted, would depend on the recovery of credit demand after Covid-19 curbs are fully lifted, the issuance of government bonds as well as the maturity dates of MLF funds. There are also chances for loan prime rate reductions, and even repo rates or MLF rates later this year when the pace of Fed hikes slows down, he said.

Lian Ping, head of Zhixin Investment Research Institute, suggested the PBOC could increase the quota for its targeted relending tools and lower their interest rates to bolster key sectors.

ACCOMODATION

With an accommodative policy and efforts of credit expansion, China’s total social finance and M2 are expected to improve. The PBOC is due to release the May data on Friday or early next week.

Wang Yifeng, analyst at Everbright Securities, said TSF would add by CNY2.7 trillion to 2.9 trillion in May, jumping from CNY910 billion in April, with a growth of outstanding amount at 10.5% from the previous 10.2%.

Besides government bond issuance, another big contributor will be the new loan which is expected to increase by CNY1.5 trillion to 1.6 trillion from CNY361.6 billion in April.

In June, Wang thinks the TSF would further expand as the policy banks, including China Development Bank, have been granted as much as CNY800 billion credit quota to support infrastructure, which would further increase bond issuance.

For the whole year, China International Capital Corp predicts the growth rate of the outstanding TSF would be in a “reasonable range at 10%-11%” since the PBOC has reiterated that the rate should be in line with the expansion of normal GDP.

According to Minsheng Bank, M2 would rise 10.5% in May, unchanged from April, as the structural policy tools are playing a bigger role in providing liquidity, and market sentiment has turned positive after Shanghai eased pandemic curbs in June.