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China interbank 7-day repo rate fixing set fresh year-high 3.15% in the week ending 30 October (chart 1), reflecting intensifying funding pressure despite bond supply for the year having already passed its peak (chart 2 and chart 3).
Heading into year-end, it is more likely than not that liquidity will go much tighter due to seasonal factors. In our view, with PBOC already showing its bias in favour of an exit of counter-pandemic monetary easing plus some measures having been introduced to restrict highly-geared property developers from financing via debt issuance, market participants are increasingly concerned about a potential repeat of financial deleveraging.
Unless PBOC cut reserves requirement ratio (RRR) further in near term, it is difficult for a reversal of the above trend to happen.
As far as the bond market is concerned, we reiterate our view that 10-year CGB yield may go higher and 2019's year-high 3.44% is reachable (chart 4), given the prevailing liquidity environment. In our view, any significant downticks of the bond yields should be taken as selling opportunities.
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