CNY Rates: Muted reaction to sub-50 PMI readings


Caught between slower growth vs bond supply
Duncan Tan02 Sep 2021
    Photo credit: Unsplash Photo


    The recent reaction of CNY rates to underwhelming Chinese economic data has been notably muted, suggesting that market expectation for China's growth is likely low and by extension, rate pricing is already quite dovish. In response to weak Chinese PMI data this week (sub-50 readings), 1-5Y CNY IRS rates and 10Y/30Y CGB yields fell by a mere 3-4bps. Current levels of front-end IRS rates, after adjusting for liquidity variables and estimates of funding volatility premium, are implying some expectations of further easing via rate cuts and/or injection of durable liquidity via more RRR cuts.

    The move lower in CNY rates can be broken down into 2 legs - one in early July around RRR cut and one in late July around regulatory crackdown and its attendant impact on the growth outlook. Since then, CNY rates have been consolidating in August. In the near-term, it appears that further deterioration in economic data would be insufficient to catalyse a third leg lower in CNY rates. For that, we probably need more explicit/forceful hints of incremental monetary easing by policymakers. On the other hand, the macro backdrop is not conducive for CNY rates to retract higher either, with economic momentum slowing, credit impulse declining and monetary bias tilted towards easing.

    There are some risks of intensifying bond supply pressures putting upward pressures on CNY rates, as CGB/LGB issuances have been slow and are thus expected to materially pick up over the remaining months of 2021. At this juncture, we are still relatively sanguine. There is the possible scenario where local governments do not fully utilize their quotas and hence, our forecast for LGB issuances will need to be revised lower. We also expect that, as long as the growth impulse stays weak, PBOC is likely to ensure sufficient liquidity and smooth financing conditions. As a case in point, between 24th and 31th August, PBOC conducted daily 7D reverse repo ops of CNY50bn (vs usual CNY10bn), appearing to try to pre-empt possible liquidity tightness around month-end.

    Duncan Tan

    FX and Rates Strategist - Asean
    [email protected]


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