In a key speech delivered at a symposium with corporate leaders in Beijing on Tuesday (21 July). President Xi (as per China Daily) urged better implementation of aid packages for businesses, with steps to enforce a more proactive fiscal policy and more prudent and flexible monetary policy to ensure macro policies are more targeted and effective, adding that China will continue with measures to cut taxes, fees, rents and interest rates and ensure its various aid measures can be channeled directly to the grassroots and benefit market players.
Before that, President Xi at a meeting on 22 Feb (5 months ago) pledged to exercise more flexibility in monetary easing.
The word "prudent" re-appeared in Xi's speech on Tuesday, echoing PBOC's bias in favour of a normalisation of the monetary policy.
Taking a look at open market operations (OMO) conducted in the recent week, we find that PBOC has been very cautious in managing liquidity. It seems that PBOC wants to have the 7-day interbank repo locked in a 2.00-2.30 range (chart 1). We think PBOC will leave liquidity just ample enough for the market to absorb new bond supply (chart 2) without resulting in a big surge of funding pressure. Against this backdrop, we will likely see a rangebound China government bond market over the most of the rest of Q3 (chart 3).
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