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]

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.
    The information herein is published by DBS Bank Ltd. It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong SAR Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.