China Insight: Policymakers Give Hawkish Signals

The 12th Lujiazui Forum, a gathering of senior government officials in economic and financial areas, was held on 18 June in Shanghai. At the forum, the remarks by CBIRC Chairman Guo Shuqing and PBOC Governor Yi Gang drew a lot of attention.

• CBIRC Chairman Guo Shuqing: "China will neither adopt flood-like stimulus nor negative rates". He also urged major global economies to consider how to exit from massive easing.
• PBOC Governor Yi Gang: "we should consider the timely withdrawal of policy tools (the counter-pandemic) financial support in advance".

Interestingly, Guo's and Yi's remarks came after Premier Li Keqiang at a State Council meeting on 17 June emphasized the need for further cuts in the reserve requirement ratio and relending facilities to bring borrowing costs downward and support the real economy as well as small/micro enterprises (chart 1) but did not mention the possibility of interest rate cuts.

The above messages combined with PBOC's very cautious attitude in conducting open market operations in recent weeks suggest the prevailing monetary policy easing cycle in China is about to end, though the policymakers will be maintaining efforts to make sure sufficient funding and liquidity is available to the small/micro enterprises.

Against this backdrop, bond yields will see more upside than downside risk over the rest of this summer, in our view (chart 2). Meanwhile, with the end of the easing cycle approaching, the IRS curve will likely be turning flatter over the next 2-3 months (chart 3).

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