China Markets Are Betting Big On Further PBOC Easing This Year

(Bloomberg) -- Traders are ramping up bets on more monetary easing in China this year, as a feeble economic recovery heaps pressure on authorities to cut interest rates and provide ample liquidity.

Chinese government bond yields are now at the lowest in nearly four years, while banks are able to raise short-term debt more cheaply in money markets than from the central bank. Signs that the People’s Bank of China is softening its grip on the yuan and a fresh reduction to deposit rates by major commercial lenders also bode well for wagers on further policy easing.

Here’s a look at signals from Chinese markets and the PBOC itself of potential easing moves:

China’s bond market has rallied since December, sending a loud signal that expectations are intensifying for fresh monetary stimulus. The yield on the 10-year sovereign notes dropped to 2.54% on Thursday, the lowest since April 2020.

There’s a growing chorus among economists calling for the PBOC to resume rate cuts after its last reduction in August, now that the Federal Reserve looks set to reverse its historic policy tightening campaign later this year. A protracted housing slump and weakness in manufacturing activity also add to the sense of urgency for policymakers.

A rate cut could happen as early as this month, Citigroup Inc. economists including Xiangrong Yu wrote in a note, adding that they expect PBOC’s rate reduction to total 20 basis points and banks’ reserve requirement ratio to fall 50 basis points in 2024, respectively. Goldman Sachs Group Inc. has identical forecasts, with a 10-basis-point rate cut in the current quarter the first likely move.

Accompanying the bond rally was a surge in trading volume, a bellwether of investor sentiment, to a record 11 trillion yuan ($1.5 trillion) in December, according to data from the China Foreign Exchange Trade System.

“The time around the Lunar New Year holiday is usually an important window for a potential rate cut or reduction to banks’ reserve requirement ratio,” Ming Ming, chief economist at Citic Securities Co., wrote in a note. “The mood in the bond market is fairly positive and the rally may continue on the back of expectations for monetary easing.”

In another example of the broader bullish fixed income trade, demand for a popular short-term debt instrument issued by Chinese banks has been so strong that the lenders are finding it cheaper to borrow from investors than the PBOC. 

The rate on one-year negotiable certificates of deposit issued by AAA rated banks is now around 2.47%, below the 2.5% on the PBOC’s one-year policy loans, the first such reversal since October.

Receding pressure on the yuan, as the dollar retreats globally in anticipation of a dovish-turning Fed, offers space for the PBOC to step up its easing efforts as well.

The yuan will strengthen for the first time in three years and appreciate to 7 per dollar by the end of 2024, as narrowing rate differentials ease capital outflows, a Bloomberg survey of traders and analysts shows. The PBOC’s decision Wednesday to weaken the yuan’s reference exchange rate by the most in over six months also signaled a pivot toward aiding growth from currency support.

“Policymakers may start shifting their focus from FX stability toward more monetary easing” when the need for significant yuan support through stronger fixings or an offshore liquidity squeeze “has become less necessary,” Jingyang Chen, Asia FX strategist at HSBC Holdings Plc, wrote in a note.

--With assistance from Yujing Liu, Shulun Huang and Fran Wang.

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