Increasing stress in Chinese bond market requires PBOC’s attention

Plans of People’s Bank of China (PBOC) to ensure sufficient amount of cash in the financial system are getting more and more attention. This subject is getting more relevant as borrowing costs for banks are increasing due to a rout in Chinese bond market.

So, while short-term money market rates remain unchanged because of the PBOC reducing reserve requirement ratio, the rate on one-year negotiable certificates of deposits has surged after significantly large retail redemptions. It’s necessary to note that the 2.7% yield of the mentioned notes is only 5 basis points less than the PBOC’s one-year MLF rate. Thus, it’s becoming more alluring for lenders to borrow from the PBOC.

The PBOC will get a chance to relieve the stress on Thursday, as 500 billion yuan, or $71.8 billion, of policy loans come due on this day. According to a Bloomberg survey, specialists suggest that a full rollover is likely to take place. They based this opinion on a fact that the COVID-Zero pivot caused a mass selloff in government bonds.

Meanwhile, Huachuang Securities Co. Chief Macro Analyst Zhang Yu considers rate cutting as a possible option. In her opinion, it’s a good time for such an action, as the Chinese national currency has raised to 6.95 per dollar, and Treasury yields have declined.