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Bloomberg
China’s government-bond investors will soon be looking for reassurance from the central bank that there’s plenty of cash in the financial system.
The country will see a “liquidity hole†of 2.8 trillion yuan ($400 billion) in January, in large part because people across the nation will withdraw cash for the Lunar New Year holiday, according to Guotai Junan Securities Co. That means bond traders expect the central bank to unlock funds to avoid the liquidity-driven panic seen in October, when the benchmark 10-year yield spiked the most in six months.
Some analysts expect the People’s Bank of China to cut the amount of cash lenders must hold as reserves. It could also opt to inject funds through its daily open-market operations, others say. But no analyst is calling for a massive net liquidity injection or a benchmark interest-rate cut, as Beijing won’t want to risk inflating prices when the consumer price index is at a seven-year high. That’s capping gains for government bonds, as it has for months.
“Bonds will get a short-term boost next month as China may cut reserve ratios to offset the liquidity drainage,†said Tommy Xie, an economist at Oversea-Chinese Banking Corp, adding this can’t be viewed as the start of a broad easing cycle. “The central bank just wants to tailor the solution to the liquidity problem. The long-term outlook for the debt market will still hinge on China’s economy and the trade negotiations.â€
Cash supply tends to tighten ahead of the week-long holiday, which in 2020 falls at the end of January. Households and corporates typically withdraw money from banks to pay for gifts and travel. That alone will drain 1.5 trillion yuan from the financial system next month, Guotai Junan analysts led by Hua Changchun wrote in a note.
Another 1.3 trillion yuan will be drained due to factors such as banks buying newly issued local government bonds, according to China’s second-largest brokerage. More than 2 trillion yuan of those notes mature in 2020, and fresh debt to refinance the borrowing thus shoring up economic growth will probably start hitting the market soon. China in November ordered local governments to speed up the issuance of “special bonds†earmarked for infrastructure projects.
China central bank adviser warns on debt chain reaction
Bloomberg
An adviser to China’s central bank urged authorities to take measures to prevent “systemic risks†from the failure of local government borrowing platforms, and warned of a “chain reaction†should defaults be allowed to damage market confidence.
Ma Jun, an external adviser to the People’s Bank of China monetary policy committee, said in an interview with Securities Times published on Wednesday that the government could allow so-called local-government financing vehicles with strong fundamentals to take over weaker counterparts including those in other provinces.
Stronger LGFVs can also seek to go public or acquire listed firms to boost their financing abilities, he said. The authorities should take steps as soon as possible, due to the risk of “compound†effects among LGFVs, Ma said. A local government investment arm in Inner Mongolia escaped a bond default this month.