China's US$900b funding gap to provide clue on stimulus

Beijing

ALL eyes are on China's central bank for any signal of potential monetary easing, as a US$900 billion funding shortage raises concerns over tighter liquidity.

The first clue may come on Monday, when the People's Bank of China (PBOC) is expected to at least offset most of the 600 billion yuan (S$122.4 billion) of policy loans coming due this month. The funds - offered by the authorities a year ago via the medium-term lending facility (MLF) - are just about 10 per cent of the total amount local banks need to repay debt and buy government bonds by the end-2020.

While a meaningful net injection could be a sign that Beijing is committed to ensuring ample cash supply, a withdrawal may stoke fears on tighter monetary policy as the economy recovers from the pandemic. China is among the first countries in the world to consider reversing emergency stimulus measures deployed to support markets in the wake of the coronavirus outbreak.

Demand for cash will surge in the coming weeks, as banks will need to repay more debt and buy newly issued government bonds. A combined 1.2 trillion yuan in MLF funds is due in November and December, or roughly a third of this year's total. On top of that, lenders are set to repay at least 3.7 trillion yuan of short-term interbank debt and use another 1 trillion yuan to buy sovereign bonds by end-2020.

But officials' recent comments have sparked funding concerns. Last week, PBOC deputy governor Liu Guoqiang said exiting easing measures was "a matter of time" and "necessary", remarks that helped send China's sovereign yield to a one-year high. The rhetoric came as recent data suggest the nation's economic recovery has been on track. A gauge of the manufacturing sector expanded for the eighth straight month, and credit growth remained stable despite a seasonal dip in October.

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"The PBOC's comments struck a hawkish tone, suggesting money supply will be tightened," said Xing Zhaopeng, an economist at Australia & New Zealand Banking Group. Any net injection less than 200 billion yuan on Monday won't be enough to soothe nerves on tight liquidity, he added.

Concerns about tighter liquidity have already driven banks to demand a higher yield when lending to each other. The interest rate on one-year negotiable certificates of deposits issued by AAA rated banks has climbed to the highest since June 2019. On Thursday, the overnight repurchase rate also jumped to the most elevated since January, providing further evidence of the thirst for liquidity. The PBOC on Friday responded by adding 160 billion yuan on a net basis into the financial system via seven-day repurchase agreements, the biggest injection since Sept 22.

Commercial banks - the biggest buyer of Chinese government bonds - now have less idle cash to invest in the fixed-income market, and some of them even need to shed their holdings of the securities for funding. Worries over cash supply have already led to a sell-off in sovereign bonds with short tenors, which are more sensitive to shifts in liquidity conditions. That has helped narrow the gap between one- and 10-year yields to near the smallest since September 2019.

That's bad news for bond bulls. The yield on benchmark 10-year sovereign bonds has risen about 8 basis points so far in November. That came after the notes just posted the longest stretch of monthly declines since 2007 in October, making them worst performers in Asia this year. BLOOMBERG