PBOC to lift liquidity and keep rates flat

Nomura predicts that China's central bank will significantly increase its supply of liquidity over the next few months and will quite likely leave rates unchanged in September.

The People’s Bank of China will significantly raise its liquidity over the next couple of months and will likely leave rates flat after a possible US Fed hike in September due to a need to boost growth, Nomura predicts.

The brokerage estimated that China will see tighter liquidity over the coming months as banks are under government pressure to ramp up lending, on top of other factors such as the maturing medium-term lending facility and tax season effects that could stretch liquidity conditions.

The PBOC uses the MLF and the standing lending facility as tools to manage short- and medium-term liquidity in China’s banking system.

A reserve requirement ratio might also be in the pipeline as it will be a better alternative for the PBOC to lift market sentiment compared with other stimulus measures like the MLF, Nomura said in its latest Asia insight report.

Japan’s largest brokerage noted that China’s interbank rates rebounded mid-August as banks started to increase their lending and bond purchases. Nomura estimates that if there is no further support from the central bank, the liquidity gap before the end of October will be around 1.1 trillion yuan (US$159.7 billion).

PBOC will keep rates flat in September as China’s economic conditions will be another concern for policy-makers, the report added.

Nomura said that given the recent rise in bond yields and rising interest rate differentials between China and the US, the PBOC may have some room not to follow the US Fed’s hike.

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