CNY Rates: Liquidity injection warranted
Tight liquidity requires easing.
Group Research - Econs, Samuel Tse1 Dec 2023
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Data prints this week pointed to a softening of growth. Industrial profit decelerated from 11.9% YoY in September to 2.7% in October. Year-to-date, it plunged by 7.8% YoY. Leading indicators, such as the Official Manufacturing PMI, fell from 49.5 in October to 49.4 in November. Both external and domestic demand are faltering, as indicated by contracting Output and New Export Order PMIs. Further liquidity injection is needed to support growth. We maintain our view that 10Y CGB yields will fall to 2.60% by the end of this year.

On the external front, elevated interest rates are cooling the global economy. This is evidenced by the retreating Manufacturing PMIs of major trading partners, including the US, EU, and ASEAN. Accelerating supply-chain relocation is also weighing on China's output. Domestically, production demand is abating. The Purchases PMI fell from 49.8 in October to 49.6 in November. Lingering retreat in private sector investment, especially in real estate, is translating into tepid domestic demand.

Recovery will require further easing. Liquidity has remained tight, with R007 and DR007 staying above the PBOC 7D reverse repo rate at 3.32% and 2.16%, respectively. In particular, banks are reportedly instructed to provide unsecured short-term funding to 50 developers on a white list, on top of the reported CNY1 trillion PSL injection. However, the immediate impact on the real economy and thus upward pressure on CGB yields will likely be kept at bay. After all, banks may refrain from increasing their exposure to the property sector given the heightening default risk. Growth of real estate developers loans has been easing since the reopening spike.

Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港
[email protected]



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