Medium and Long-term Interbank Rates Hit 18th Month Low as Chinese Monetary Policy Loosens

Interbank lending rates in China have seen a decline across medium and long-term maturities, following the signalling of looser monetary policy from the central bank amidst escalating Sino-US trade tensions.

The six-month and one year Shanghai Interbank Offered Rates (SHIBOR) both dropped to their lowest levels since January 2017 on 30 July, declining 7 basis points to 3.433%  and 4.4 basis points to 3.737% respectively.

Rates for interbank certificates of deposit (CD’s) have also seen marked declines. The average rate for AAA-rated six-month interbank CD’s has fallen 60 basis points since the end of last month, while AAA-rated one-year interbank CD’s have seen a drop of 40 basis.

The rates declines arrive in the wake of expanded liquidity injections in July by the Chinese central bank, as well as a subtle change to the terms used to describe monetary policy settings, with a shift from “rationally stable” to “rationally ample.”

Figures from financial data provider Wind indicate that the Chinese central bank released 1.4605 trillion yuan in liquidity via open market operations during the period from 1 – 23 July, as compared to just 331 billion yuan during the same period last year.

While PBOC subsequently refrained from open market operations for five consecutive trading days, leading to a new withdrawal of 500 billion yuan, analysts point out that this move was likely a case of the central bank pursuing a liquidity management theme of “contracting the short and expanding the long.”

The State Council has also announced that China’s fiscal policy will become more active in the second half of 2018, as the central government steps up ¬†measures o shore up economic growth should Sino-US trade tensions worsen.

Domestic analysts are already adjusting their expectations of near-term liquidity conditions in China, with some indicating that ample liquidity in the banking system as well as measures from PBOC to support non-government bonds could mark turning point for the debt market.

 

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