Possibility Of RRR Cut Gains Traction

The PBOC drained a net CNY40bn of liquidity from the system today, gradually withdrawing the additional liquidity added at August month-end. Repo rates are higher, but within recent ranges. The overnight rate and 7-day rate are no longer inverted after the overnight rate dropped at the end of last week. Futures are higher, 10-Year up some 10 ticks at 100.43, equity markets also seeing – CSI 300 up around 1%.

• The PBOC is likely to increase liquidity by cutting the reserve requirement ratios or even interest rates this year should the market need it, the China Securities Journal reported citing Zeng Gang, deputy director of the National Institution for Finance & Development. The probability of RRR cuts is higher, as it will improve liquidity more directly and drive banks to increase capital investment and lower credit costs, the newspaper cited Zeng as saying. The PBOC will provide medium and long-term, low-cost funds for specific entities and areas such as technology innovation, SMEs, rural revitalization and carbon emission through monetary tools such as special-purpose re-lending and rediscounting, Zeng was cited as saying.