Nomura: Markets Are Overly Concerned About Imminent PBoC Tightening

Nomura note that "both bond and stock markets were unsettled yesterday by two seemingly coordinated events. First, the PBoC only did a small open-market operation (OMO) of CNY2bn, when liquidity is obviously tight (given CNY80bn in 7-day OMO maturing, this resulted a net withdrawal of CNY78bn), sending the 7-day repo rate (R007) to above 3.0%. Second, Mr. Ma Jun, a PBoC monetary policy committee member, warned that bubbles are appearing in stock and property markets, these bubbles are related to monetary easing and they will be further inflated if monetary policy is not shifted appropriately. Some corrections in the buoyant stock markets may not be a bad thing, but we think markets are overly concerned about an imminent monetary tightening in China. We see three special factors behind the tight interbank liquidity: a higher conversion of export proceeds to CNY, a surge in southbound investment through the Mainland-HK Stock Connect, and a bigger settlement for imports in CNY. We expect neither hikes nor cuts to policy rates and the reserve requirement ratio (RRR) in 2021 and, in our view, the PBoC strongly intends to maintain relative stability of the CNY against its basket (CFETS). We expect growth in outstanding aggregate financing (AF), which rose from 10.7% Y/Y at end-2019 to 13.3% at end-2020, to slow gradually to around 11.5% towards end-2021"