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Supply remains a concern in Q4 (chart 1). With reference to the central government's financing plan for the year, we expect supply of CGBs to remain huge in the rest of the year. Year-to-date the net CGB financing proceeds reached CNY2473bn, with the remaining CNY1307bn for Q4, which accounts for as much as 35% of the full-year net financing target.
With bond supply remaining plentiful and PBOC continuing to be reluctant to release more liquidity, we expect financial institutions will keep fighting hard for funding. Against this backdrop, NCD yield will continue to be elevated (chart 2), as a result limiting the downside room for interbank money rates.
As far as the interbank liquidity is concerned, historically seasonals favour funding pressure elevation in the second half of Oct. Since 2010 (inclusive), we have seen funding pressure elevation in the second half of Oct in six years.
Given the above factors, we expect the banking system liquidity will remain structurally tight in Q4 (chart 3). Though PBOC should be willing to conduct medium-term lending facility (MLF) renewals over the rest of the year, we doubt it has intention to reduce reserve requirement ratio (RRR) much further.
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