Wide money is expected to heat up, and Goldman Sachs predicts that there will be three RRR cuts and one interest rate cut in China next year.
Nearly half of the fourth quarter of 2023 has passed, and the market’s discussion on economic drivers and policy expectations for the year and next year has not diminished.
Judging from the financial data just disclosed in October, the total amount of social financing and credit has increased year-on-year, and the liquidity tension between banks has eased. However, the recent tax period disturbance has once again pushed up the interest rate of funds, and the new capital regulations have aggravated the tension trend of interbank deposit certificates. In addition, there are no obvious signs of reversal in the expectation of fundamental repair. Institutions generally believe that the monetary policy orientation will continue to be loose during the year, including excessive continuation and RRR reduction in the open market.
As for the lack of liquidity between banks since August, apart from issuing bonds and other factors, many views still believe that it is related to concerns about stabilizing the exchange rate. However, some institutional sources told reporters that the impact of stable exchange rate on liquidity is mainly to limit the total amount of wide currency space such as interest rate cuts, but in history, the stage when the exchange rate of RMB against the US dollar broke through 7 or even 7.2 did not affect the landing of wide currency. Flash Hui, chief economist of Goldman Sachs in China, also told reporters that at present, from a fundamental and technical point of view, the pressure for RMB to break through 7.3 against the US dollar is not obvious.
Looking forward to next year, foreign financial institutions such as Goldman Sachs and UBS all showed their optimistic attitude towards China’s economic growth prospects in their latest outlook reports. It is generally believed that consumption in the troika has maintained recovery, investment has continued to increase, and exports have improved. Among them, Goldman Sachs mentioned in the Macroeconomic Outlook of China in 2024 that fiscal policy will continue to increase support next year, and monetary policy will also support fiscal efforts in terms of price and quantity. It is expected that there will be three RRR cuts and one interest rate cut next year.
The funds have interfered or turned to short-term factors.
On November 14th, although the central bank made a net investment of 71 billion yuan through open market operations, the inter-bank repo rate both rose. On that day, the overnight pledged repo rate of banks rose by about 14bp from the previous day to 1.90%. The 7-day repo rate rose by about 16bp to 2.04%.
In addition, most of the Shanghai Interbank Offered Rate (shibor) rose, and overnight shibor reported 1.9130%, up 15.90 basis points; In 7 days, shibor reported 1.9670%, up 12.70 basis points; Shibor reported 2.2070% in 14 days, up 11.80 basis points.
In fact, although the funding situation has been tight since August, the funding situation has been obviously looser recently than in the previous period. Last week, DR001 fluctuated between 1.6% and 1.7%, while R001 was basically between 1.7% and 1.8%, and the weekly average decreased by 3bp and 39 BP respectively compared with the previous week. DR007 kept fluctuating at the 7-day reverse repo rate of 1.8%, R007 fluctuated between 1.9% and 2.0%, and the weekly average dropped by 14bp and 35bp respectively compared with the previous week.
A number of institutional sources pointed out that at present, the impact of trillions of new government bonds on funds is limited. The funds in the middle of this month are tight again, mainly due to short-term factors such as the deadline for paying taxes in the middle of the month.
However, with the loosening of funds, the interest rate of interbank deposit certificates did not go down as scheduled, and the issue interest rate continued to increase. According to the data of GF Securities Research Report, last week, the issuance rate of one-year stock bank certificates of deposit was as high as 2.62% on Thursday, which was 12bp higher than the one-year MLF rate, and fell slightly to 2.61% last Friday. In terms of circulation and maturity, although the issuance scale of interbank certificates of deposit approached 900 billion yuan last week, the largest circulation in a single week since April, due to the large maturity, the net financing turned negative in the week, reflecting that the bank’s funding gap still exists.
The above-mentioned institutional sources told reporters that in addition to the strong demand for bank financing, the new capital regulations have been officially released recently, and the risk weight of certificates of deposit with a maturity of more than 3M has increased, which has also aggravated the shortage of certificates of deposit to some extent.
Ming Ming, chief economist of CITIC Securities, pointed out that it is currently in the stage of wide currency expectation game. As for the bond market, it is clearly predicted that if the financial data does not exceed market expectations, if the economic data to be released soon shows that the fundamentals are weak and the reality continues, considering the steady growth in the previous period and the wide range of financial instruments, it is expected that the long-term bond interest rate will still follow the MLF interest rate.
On the afternoon of 14th, treasury bonds futures continued to decline, with the main contract of 30-year treasury bonds futures closing down by 0.26%, the main contract of 10-year treasury bonds closing down by 0.12%, the main contract of 5-year treasury bonds falling by 0.08% and the main contract of 2-year treasury bonds falling by 0.06%. The yields of major inter-bank interest rate bonds mostly rose, and the yields of 10-year treasury bonds, 10-year CDB bonds and 5-year CDB bonds all rose to varying degrees.
Judging from the institutional research report and many institutional sources interviewed by reporters, the expectation of RRR reduction in the fourth quarter is still strong. In addition, the data shows that 850 billion MLF will expire on Wednesday and 1.25 trillion yuan of reverse repurchase will expire on Friday, and the market is generally concerned about the central bank’s excessive continuation measures.
Wide money is expected to last until next year.
China Macroeconomic Outlook 2024 released by Goldman Sachs recently mentioned that looking forward to China’s macroeconomic policies next year, fiscal policy will continue to increase support, and monetary policy will also support fiscal efforts in terms of price and quantity. It is expected that there will be three RRR cuts and one interest rate cut next year.
This forecast also supports the setting of China’s macroeconomic growth target. On the basis of judging China’s economic growth rate of 5.3% this year, Goldman Sachs predicts that China’s economic growth rate will be 4.8% next year.
According to Flash Hui’s analysis, after considering the epidemic stage, the rebound support in all aspects is obvious, and the growth rate of 5.3% this year is not very high, which also shows that China’s economy is still partially challenged, including the confidence of real estate, residents and private enterprise sectors, as well as land finance, urban investment and financing (local debt) and other issues.
She further pointed out that considering that it will take some time to solve the above problems, and local governments are facing the pressure of debt repayment, it is expected that the central government will increase its support to make up for the fiscal expenditure gap of local governments, which is also an important support for achieving the growth target. At the same time, monetary policy, as an important support for fiscal policy, is expected to maintain the frequency of three RRR cuts and one interest rate cut every quarter next year.
"Monetary policy is not only a valuable operation but also a quantitative operation. Credit is also a process of increasing (accelerating). The growth rate (forecast) of social financing scale this year is 9.3%, and it is predicted that there will be a growth rate of 10% next year, and credit support will be overweight. " Flash said.
According to media reports, Wang Tao, head of Asian economic research and chief China economist at UBS, also said in his forecast recently that the domestic monetary and credit policies will continue to be loose, and the central bank will cut the MLF policy interest rate by 10 basis points again during the year, and further cut it by 10 basis points in 2024 to 2.3%, but it will not significantly cut the policy interest rate; In the fourth quarter and 2024, the central bank may lower the RRR by another 25 basis points, partly to cope with the large-scale issuance of government bonds in the coming months.
For the long-term lack of liquidity among banks in recent months, in addition to the issuance of additional government bonds and the resumption of special refinancing bonds, many views think that it is related to the concern of stabilizing the exchange rate, and that this is a major factor leading to the delay in the RRR cut expected by the market in the fourth quarter. However, the above-mentioned institutional sources told reporters that the impact of stable exchange rate on liquidity is mainly to limit the total amount of wide currency space such as interest rate cuts, but the stage when the exchange rate broke through 7 or even 7.2 in history did not affect the landing of wide currency. Flash Hui also told reporters that at present, from a fundamental and technical point of view, the pressure on the RMB exchange rate against the US dollar to break through 7.3 is not obvious.
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