Will September see smooth capital supply in the key moment when entering the third quarter? Current liquidity environment has changed quietly when compared with that at the end of the previously quarters. On one hand, capital conditions have become rather loose and monetary interest rate has kept decreasing since the middle of this year. On the other hand, the People’s Bank of China (PBOC), or the central bank, required reasonably sufficient liquidity instead of reasonably stable liquidity.
Under the new pattern about liquidity, the market currently focuses on whether the PBOC is likely to upscale interest rate in open market operation if the US Federal Reserve raises interest rate in September, and how it will deal with the pressure from capital withdrawal from the market as a lot of local government bonds will be issued and negotiable certificates of deposits (NCDs) will mature in the month.
September to see maturity of NCDs and peak issuance of local government bonds
There won’t be many capitals to mature in open market in September as the PBOC suspended reverse repo previously. Only 100 billion yuan of deposits of treasury cash and 176.5 billion yuan of medium-term lending facility will expire. In addition, regular factors like rate payment and funds outstanding for foreign exchange impose less influence in liquidity in the month.
It is noteworthy that liquidity will face pressure from issuance of local government bond and maturity of NCDs. It is predicted that due to pressure from issuance of bonds for special purpose, 900 billion yuan or even 1 trillion yuan of local government bonds will be issued, higher than the peak in August. By that time, bond subscription will lead to stress in capital withdrawal. Interest rate of funds and fluctuation both saw significant rise in August amid explosive issuance of local government bonds.
“Public deposits won’t remain in national treasury for a long time. Spending will increase after bond issuance quickens, which will hedge the issuance of government bonds. However, increase in financial spending will lag behind the bond issuance. The market friction arising from this may cause turbulence in liquidity environment,” said Ming Ming, chief analyst on fixed-income investment of Citic Securities.
Huge maturity of NCDs in September is also a bigger concern for the market. According to statistics from Wind Info., the amount of NCDs to mature in the month exceeds 2.14 trillion yuan, the second highest level within this year. Most of them will expire in the first half of this month, which will probably stress the capital supply.
Whether the PBOC will raise open market interest rate?
Given the Fed’s current position, and as US economy is in good condition and the inflation is rising, market participants believes that the Fed’s probability of raising interest rates in September was large.
"Once the Fed raises interest rates, the People's Bank of China is not necessary to follow up. If the PBOC raises interest rates, it might raise the open market operating rate by 5 basis points,” said Wang Yifeng, director of the Minsheng Bank Research Institute Financial Center, in an interview with Shanghai Securities News.
Wang Yifeng explained that under the current domestic economic situation, on the one hand, if the PBOC raises the operating rate of the open market, it will have a high probability of cooperating with medium and long-term liquidity to stabilize market fluctuations; on the other hand, the current countercyclical factor has temporarily stabilized the exchange rate, the domestic economy also requires a relatively loose liquidity environment and relatively stable market expectations.
However, there are also expectations that there is still the possibility of raising interest rates in the future. Guotai Junan Securities notes in a research report that with the continuous supply of local debt and the loosening credit policy, liquidity is unlikely to return to the abnormal easing state in early August.
As for the expectation of RRR cut, Liu Linan, strategist of Deutsche Bank, said that there is still the possibility of targeted RRR reduction in the second half of the year, and it is also possible to replace the RRR with MLF to release medium and long-term liquidity. "In fact, the recent open market operation by PBOC has aimed long. It uses more MLF to supplement the demand of the real economy for medium and long-term funds. But this does not mean that monetary policy will be loosening, but that it will seek a balance among multiple goals of stabilizing exchange rates, reducing leverage, and stabilizing growth."
Translated by Coral Zhong & Vanessa Chen
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