In sync with that policy intent, short-term rates have barely moved. The volume-weighted average rate of the benchmark 7-day repo, a gauge of liquidity, stood at 2.1681% on Tuesday, down from 2.2142% ahead of the RRR announcement. The benchmark 10-year Chinese government bond (CGB) yield dipped to 2.932% last week, its lowest in nearly a year, after news of the RRR cut. It stood at 2.959% on Tuesday. The PBOC too has kept its seven-day reverse repo rate steady at 2.2% since cutting it sharply last March in response to pandemic-induced shocks to the economy.
“(Current) monetary policy is a precautionary measure for the upcoming slowdown, and on the other hand it’s providing support to the banking sector as well so that they can actually give liquidity to the sectors that the government wants to support,” said Gary Ng, Asia-Pacific economist at Natixis in Hong Kong. But the steady prime rate and unchanged rates on medium term lending facility (MLF) loans last week suggest that while Beijing pushes for more lending and credit growth, it is maintaining heavy scrutiny of the local government and property sectors and avoiding full-scale easing.
Central bank advisers made clear the RRR cut was a simple cash management operation ahead of the maturities of 400 billion yuan worth of medium-term lending facility (MLF) loans. The PBOC subsequently left MLF rates unchanged while rolling over some maturing loans. That cut, which added a trillion yuan ($154.71 billion) to money supply, and signs of moderation in the economy had sparked speculation about policy easing.
“However, it remains data dependent and domestic consumption is the main thing to watch,” he said. ($1 = 6.4636 Chinese yuan) Carlos Casanova, senior economist for Asia at Union Bancaire Privee in Hong Kong, said policymakers were unlikely to resort to aggressive policy easing after what he called “too ambitious” tightening earlier in the year, but will continue to manage liquidity through open market operations.
“Given stable funding costs, the 10Y CGB yield will be driven lower to 2.80% by falling inflationary expectations,” they said. That would take the spread between the short-term repo rate and 10-year yield to levels last seen in 2019, they said. In a note, ANZ economists said they expect that repo rate to act as an anchor for the short end of a flattening Chinese sovereign yield curve.
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