MNI: PBOC Set To Cut RRR As Covid Hits, Yields Spike

The People’s Bank of China is expected to cut banks’ reserve requirement ratio in coming days as fresh Covid outbreaks fuel concerns about the sluggish economic recovery, helping soothe the bond market that has seen yields spike on fears of tightening liquidity, advisers and analysts told MNI.

The State Council unexpectedly announced on Wednesday that RRR cuts should be deployed at a “timely and appropriate” pace to retain “reasonable and ample” liquidity.The PBOC is expected to follow the order promptly. MNI recently reported a RRR cut was likely. (See MNI PBOC WATCH: Targeted Easing To Boost Credit, RRR Cut Seen)

Analysts forecast a cut between 25bp and 50bp, unlocking CNY500 billion to CNY1 trillion of liquidity as early as Friday. The PBOC may move next month when a CNY500 billion medium-term lending facility matures on December 16.

Monetary policy should remain accommodative to boost market confidence, and also to support growth during the latest Covid outbreak and assist a recovery in the property market, said Li Gang, senior researcher at National Institution For Finance and Development, noting that liquidity would remain ample for at least a quarter.

He said the economy would suffer if the Covid situation lasted for a couple more weeks, possibly requiring the PBOC to step up its easing.

An RRR cut would reduce the cash lenders need to hold aside, which would increase liquidity and push down money market rates, said Bank of China researcher Liang Si. He agreed the PBOC would soon cut the RRR to incentivise lenders to expand medium and long-term credit.

Money market rates have risen in recent weeks as the PBOC has trimmed its liquidity injections. This has fueled concerns the PBOC was sending a warning about excess leverage in the wholesale market, which in turn has weighed on bond market sentiment.

BOND SLUMP

Chinese bond yields spiked last week as sentiment soured after China announced relaxed Covid controls and unveiled measures to support the property market. One-year CGB yields surged 21bp to 2.17% and 10-year CGB yields rose 9bps to 2.83% for the week. Mutual funds and wealth managers sold over CNY400 billion worth of bonds, the largest weekly sell-off since 2019.

Sentiment has improved this week as the PBOC “guided” big banks to increase liquidity injections, a bond trader told MNI. This steered the overnight repo rate below 1% on Tuesday. Interbank liquidity is “quite comfortable”, especially given the prospect of a RRR cut, he said, noting the one-year CGB yield fell 10bp after the market open on Thursday.

The worst of the bond market slump has likely passed, said Li. However, volatility may continue and needs to be watched. Liang said additional liquidity would come once credit demand started to increase, with targeted tools - combined with broader easing measures - used to expand credit to specific sectors.

Government issuance was likely to have limited impact on interbank liquidity over the rest of the year, Zhao Quanhou, researcher at the Chinese Academy of Fiscal Science, told MNI. He said even if the new quota of local government special bonds for 2023 was front-loaded, the related fund raising would take place next year.

LOW INFLATION

China’s low inflation provides room for more easing, said Zhao. However, the pace and extent of future easing may be reduced given capital outflows and concerns about the weaker yuan.

China’s PPI fell at a 1.3% y/y pace in October, the first decline in two years, while CPI rose 2.1% y/y compared with 2.8% in September.

Liang said inflation would remain tepid in 2023 as consumption is soft and commodity prices are down. Additionally, the sluggish property sector is unlikely to see a turning point in the short term.