Overnight reverse repo yield hit a two-month high at 14.5 percent on September 28. The market previously thought the liquidity to be loose at the end of the third quarter, which should have been tight, but it seems to be tight again in view of the price of funds. Analysts viewed that low excess reserve ratio and more disturbing factors at the end of a quarter make it easy for the liquidity to be tight while difficult to be loose. However, the market made insufficient judgment and preparation on risk of liquidity fluctuation previously, and this might be the key reason causing difference in expectation. At present, the tight liquidity is a result of contradiction between supply and demand. As the trans-quarter work of non-banking institutions comes to an end, the liquidity has passed the tightest status and will embrace a process of self-repair. Looking into the future, as the monetary policy won’t be too loose or too tight and it will be hard for excess reserve ratio to pick up greatly, capital supply will still face problems like risk of fluctuation and stratification after the end of the third quarter.
Tough for traders before holidays
It is supposed to be easy for liquidity to be tight but hard to be loose at the end of a season, but the market predicted it to be loose at the end of the third quarter, which was supposed to be tight. The market went through the end of the first and the second quarters easily, and it gradually realized that with the peak-load shifting operation of China’s central bank, or the People’s Bank of China (PBOC), fluctuation in liquidity shows anti-seasonal characteristics.
The market looks forward to the loose liquidity in September again, and the market trend also in early September also backed up this expectation. However, with the second half of September coming, tax calendar intensified the risk fluctuation. After the influence of tax payment weakened, the tight situation of liquidity was improved. But it turned tight again this week and tended to worse.
The weighted yield of the most typical 7-day reverse repo (DR007) of banking market rose to 3.15 percent on September 26, the highest level since early May. Capitals will be in short supply in the short term during holidays, forcing institutions to lengthen financing term gradually. The weighted yield of 21-day reverse repo (DR021) jumped by over 30 basis points to 5.27 percent on September 27, surging by over 5 percent for the first time since the second half of this year.
Yield of reverse repo at exchanges has fully showed its elasticity at the end of the third quarter. On September 26, the weighted yield of reverse repos with terms of including and within 14 days at Shanghai Stock Exchange (SSE) all exceeded 6 percent, and those of 1- to 3-day products moved up by over 100 basis points. On September 27, yield of products with terms including and within 7 days moved up above 7 percent. Yield of overnight reverse repo (GC001) fluctuated at the end of trading hours but it hit a two-month high at 14.5 percent during trading hours.
Large banks and the central banks didn’t pump capitals into the market. Industry insiders reflected that it will be tough for many capital traders before the National Day and the Mid-Autumn Day holidays.
Deviation in prediction of institutions
There’s also deviation in expectation about liquidity at the end of March and June, but actually the liquidity situation was better than expected. However, it was worse than expected at end of September. Analysts remarked that lower excess reserve ratio of financial institutions was the major cause for the tight liquidity. Lower excess reserve ratio meant limited liquidity and insufficient safety margin. When faced with disturbing factors, liquidity got tightened easily and fluctuation strengthened. At the end of September, supervision assessment, enchashment before long holidays and change in financial revenues and expenditures led to fluctuation in liquidity.
Liquidity will inevitably experience fluctuation under the situation with lower excess ratio and multi-disturbance factors. The key problem is that the market was too optimistic about the market liquidity, leading to the deviation in prediction.
Analysts remarked that some institutions made the deviated prediction from three aspects. Firstly, as liquidity was loose in March and June, some institutions took it for granted that it will be the same in September. They didn’t correctly predict the influence of supervision assessment and the long holidays. Secondly, they are too rosy abut financial injection from the government. Some institutions reflected that government injected capitals at a pace slower than expected and the amount of capitals was not as much as expected at the last week of this month. Thirdly, some institutions underestimated the impact of new regulations on monetary funds.
Industry insiders pointed out that due to multi factors including supervision assessment, large banks are very cautious in lending capitals and are particularly reluctant to lend loans across seasons. This makes it more difficult for small and medium banks and non-banking institutions to get financing and results in outstanding contradiction between supply and demand of liquidity.
According to a report of China International Capital Corporation Limited (CICC), the new rules about liquidity of public funds, which are scheduled to be implemented from October 1, enhance requirement on qualification of monetary funds as mortgage. Most non-banking products fail to meet relevant requirements, while monetary funds are major sources of non-banking products. Therefore, it becomes more difficult for capitals flowing from banks to non-banking institutions, worsening the tight situation of liquidity.
Capital supply went through March and June easily, which was caused by the correct prediction and sufficient preparation of institutions. But they were too optimistic about the liquidity at the end of the third quarter. Without prudential preparation, many factors resulted in tight liquidity. Non-banking institutions were unprepared and were eager to choose any capital supply, driving capital supply to be tight and pushing up market interest rate.
Capital supply gets tight temporarily
Analysts indicated that the tight capital supply is temporarily regarding to fluctuation of yield of reverse repo at exchanges.
Non-banking institutions are major participants of reverse repo market. When it is difficult to get funds from banking market, they turn to exchanges, which will easily boost yield of reverse repo at exchanges.
Spread between DR007, yield of reverse repo of interbank depository institutions, and R007 of all institutions widened and spread between yield of reverse repo of exchanges and that of banks expanded lately, indicating that non-banking institutions were the major ones facing pressure on liquidity.
In addition, although the capital supply was not loose and some institutions even felt the tight supply, the central banks were quite calm. It hadn’t injected capital supply and even drained capitals from the market for three consecutive days since September 20. In the middle of the month, it pumped large amount of capitals in to the market to deal with regular tax payment, indicating that it didn’t change its attitude of maintaining liquidity basically steady. Since the PBOC’s stance hasn’t changed, it didn’t inject capitals when the capital supply was tight at the end of the third quarter again, which means that the fluctuation of liquidity is acceptable.
The central bank focuses more on the total quantity of liquidity and the liquidity of depository institutions. At the end of the quarter, financial injection supports the total quantity of liquidity. So there’s no abnormal situation in liquidity of depository institutions, and this is the key for the central bank to be calm when facing short-term fluctuation in monetary market.
Under current financial environment, making some institutions with high leverage upset meets the demand of preventing risk and cutting leverage. When the capital supply was less fluctuating in June and July, some financial institutions expanded leverage again. When the liquidity kept tight balance in August and September, these institutions bear large pressure on liquidity.
With the end of the third quarter approaching, the trans-quarter work of non-banking institutions comes to a close, and partial contradiction between supply and demand of liquidity will be eased. Besides, there were more financial expenditures at the end of last month. The central bank can slightly adjust open market operation when necessarily. The tightest period for liquidity has passed, the situation is expected to see improvement later. Market interest rate will decrease in next season.
The capital supply was neither too loose nor too tight in September, which was exactly the currency authority hoped to see. As the monetary policy won’t be loose in the short term and it will be hard for excess reserve ratio to pick up greatly before the financial capitals are injected at the year end, capital supply will still face problems like risk of fluctuation and stratification in the fourth quarter. If the authority wants to break the tight balance of capital supply, it needs to adjust monetary policy significantly, which will mainly depend on the performance of economic fundamentals.
(By Vanessa)
Tough for traders before holidays
It is supposed to be easy for liquidity to be tight but hard to be loose at the end of a season, but the market predicted it to be loose at the end of the third quarter, which was supposed to be tight. The market went through the end of the first and the second quarters easily, and it gradually realized that with the peak-load shifting operation of China’s central bank, or the People’s Bank of China (PBOC), fluctuation in liquidity shows anti-seasonal characteristics.
The market looks forward to the loose liquidity in September again, and the market trend also in early September also backed up this expectation. However, with the second half of September coming, tax calendar intensified the risk fluctuation. After the influence of tax payment weakened, the tight situation of liquidity was improved. But it turned tight again this week and tended to worse.
The weighted yield of the most typical 7-day reverse repo (DR007) of banking market rose to 3.15 percent on September 26, the highest level since early May. Capitals will be in short supply in the short term during holidays, forcing institutions to lengthen financing term gradually. The weighted yield of 21-day reverse repo (DR021) jumped by over 30 basis points to 5.27 percent on September 27, surging by over 5 percent for the first time since the second half of this year.
Yield of reverse repo at exchanges has fully showed its elasticity at the end of the third quarter. On September 26, the weighted yield of reverse repos with terms of including and within 14 days at Shanghai Stock Exchange (SSE) all exceeded 6 percent, and those of 1- to 3-day products moved up by over 100 basis points. On September 27, yield of products with terms including and within 7 days moved up above 7 percent. Yield of overnight reverse repo (GC001) fluctuated at the end of trading hours but it hit a two-month high at 14.5 percent during trading hours.
Large banks and the central banks didn’t pump capitals into the market. Industry insiders reflected that it will be tough for many capital traders before the National Day and the Mid-Autumn Day holidays.
Deviation in prediction of institutions
There’s also deviation in expectation about liquidity at the end of March and June, but actually the liquidity situation was better than expected. However, it was worse than expected at end of September. Analysts remarked that lower excess reserve ratio of financial institutions was the major cause for the tight liquidity. Lower excess reserve ratio meant limited liquidity and insufficient safety margin. When faced with disturbing factors, liquidity got tightened easily and fluctuation strengthened. At the end of September, supervision assessment, enchashment before long holidays and change in financial revenues and expenditures led to fluctuation in liquidity.
Liquidity will inevitably experience fluctuation under the situation with lower excess ratio and multi-disturbance factors. The key problem is that the market was too optimistic about the market liquidity, leading to the deviation in prediction.
Analysts remarked that some institutions made the deviated prediction from three aspects. Firstly, as liquidity was loose in March and June, some institutions took it for granted that it will be the same in September. They didn’t correctly predict the influence of supervision assessment and the long holidays. Secondly, they are too rosy abut financial injection from the government. Some institutions reflected that government injected capitals at a pace slower than expected and the amount of capitals was not as much as expected at the last week of this month. Thirdly, some institutions underestimated the impact of new regulations on monetary funds.
Industry insiders pointed out that due to multi factors including supervision assessment, large banks are very cautious in lending capitals and are particularly reluctant to lend loans across seasons. This makes it more difficult for small and medium banks and non-banking institutions to get financing and results in outstanding contradiction between supply and demand of liquidity.
According to a report of China International Capital Corporation Limited (CICC), the new rules about liquidity of public funds, which are scheduled to be implemented from October 1, enhance requirement on qualification of monetary funds as mortgage. Most non-banking products fail to meet relevant requirements, while monetary funds are major sources of non-banking products. Therefore, it becomes more difficult for capitals flowing from banks to non-banking institutions, worsening the tight situation of liquidity.
Capital supply went through March and June easily, which was caused by the correct prediction and sufficient preparation of institutions. But they were too optimistic about the liquidity at the end of the third quarter. Without prudential preparation, many factors resulted in tight liquidity. Non-banking institutions were unprepared and were eager to choose any capital supply, driving capital supply to be tight and pushing up market interest rate.
Capital supply gets tight temporarily
Analysts indicated that the tight capital supply is temporarily regarding to fluctuation of yield of reverse repo at exchanges.
Non-banking institutions are major participants of reverse repo market. When it is difficult to get funds from banking market, they turn to exchanges, which will easily boost yield of reverse repo at exchanges.
Spread between DR007, yield of reverse repo of interbank depository institutions, and R007 of all institutions widened and spread between yield of reverse repo of exchanges and that of banks expanded lately, indicating that non-banking institutions were the major ones facing pressure on liquidity.
In addition, although the capital supply was not loose and some institutions even felt the tight supply, the central banks were quite calm. It hadn’t injected capital supply and even drained capitals from the market for three consecutive days since September 20. In the middle of the month, it pumped large amount of capitals in to the market to deal with regular tax payment, indicating that it didn’t change its attitude of maintaining liquidity basically steady. Since the PBOC’s stance hasn’t changed, it didn’t inject capitals when the capital supply was tight at the end of the third quarter again, which means that the fluctuation of liquidity is acceptable.
The central bank focuses more on the total quantity of liquidity and the liquidity of depository institutions. At the end of the quarter, financial injection supports the total quantity of liquidity. So there’s no abnormal situation in liquidity of depository institutions, and this is the key for the central bank to be calm when facing short-term fluctuation in monetary market.
Under current financial environment, making some institutions with high leverage upset meets the demand of preventing risk and cutting leverage. When the capital supply was less fluctuating in June and July, some financial institutions expanded leverage again. When the liquidity kept tight balance in August and September, these institutions bear large pressure on liquidity.
With the end of the third quarter approaching, the trans-quarter work of non-banking institutions comes to a close, and partial contradiction between supply and demand of liquidity will be eased. Besides, there were more financial expenditures at the end of last month. The central bank can slightly adjust open market operation when necessarily. The tightest period for liquidity has passed, the situation is expected to see improvement later. Market interest rate will decrease in next season.
The capital supply was neither too loose nor too tight in September, which was exactly the currency authority hoped to see. As the monetary policy won’t be loose in the short term and it will be hard for excess reserve ratio to pick up greatly before the financial capitals are injected at the year end, capital supply will still face problems like risk of fluctuation and stratification in the fourth quarter. If the authority wants to break the tight balance of capital supply, it needs to adjust monetary policy significantly, which will mainly depend on the performance of economic fundamentals.
(By Vanessa)
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