The Chinese government’s plan to inject more than Rmb1 trillion (US$157.3 billion) into the money market next month could disappoint market players with high expectations, according to the Bank of America-Merrill Lynch (BoA-Merrill).
More than Rmb1 trillion of treasury deposits are expected to be allocated by the Ministry of Finance (MOF) to government departments in November and December, according to Xinhua News on November 7.
Beijing seeks to provide this funding to ensure that there is sufficient money supply to the financial system during these two months. But BoA-Merrill still expects liquidity to tighten during this period of weak inflation figures and as the government pays off large amounts of central bank bills that mature next week.
The only other solution to improve liquidity is for the central bank to cut the reserve requirement ratio (RRR) or embark on a reverse repo.
“We expect liquidity to tighten in December and January until the central bank is forced to cut the reserve requirement ratio,” said Bin Gao, a Hong Kong-based rates analyst at BoA-Merrill in a research report yesterday (November 10). “It could also potentially start a reverse repo.”
A repo is a form of short-term borrowing for dealers typically in government securities. The dealer sells the securities to investors, usually for a fixed short term and buys them back. A reverse repo is the other way round, where the dealer buys securities from the public and sells them back in the future.
The report notes that given the tightened liquidity situation, the PBOC would be expected to cut the RRR before the end of the first quarter of next year, but it will be reluctant to do so unless “forced by the market”.
China’s seven-day repo rate declined from 4.97% at the end of October to 3.55% on November 9, while the one-year swap rate reached an eight-month low of 3.17% at the end of that month, according to the report.
Bank deposit growth in China is showing signs of weakness. In the third quarter of the year, 16 listed commercial banks lost a total of Rmb100 billion deposits and 10 of them saw deposits falling Rmb330 billion.