In the middle of the year, mobility is an unavoidable topic. The historical law of liquidity fluctuations, coupled with the reality that banks’ excess reserves are low and supervision is tightening, caused the market to be quite cautious about liquidity expectations in June. However, the easing of short-term funds in May exceeded expectations, showing that there are still positive factors at this stage. Analysts pointed out that in June, faced with uncertain factors such as the possible adjustment of the Fed’s policy, the semi-annual assessment of domestic banks, and the adjustment of the balance sheet of financial institutions, liquidity will inevitably fluctuate and become tense. Persistent, abnormally intense sexual encounters will be a rare event.

“Can’t get out” and “Can’t get out”

“Begging for an overnight loan before, and now asking for an overnight loan.” The remarks of the capital trader showed the contrast of funds around May.

The market was originally not optimistic about the liquidity situation in May, because it faced both the expiry of a large number of MLFs in May and the disturbance of corporate income tax settlement in the previous year. But in fact, except for one or two trading days at the beginning of the month, the market capital in May was generally relatively loose, especially in the second half of the month, the short-term liquidity continued to be abundant, and the supply exceeded demand in some parts.

Short-term funding rates fell significantly in May. Taking the interbank pledged repo rate as an example, the weighted average interest rate of overnight repo (R001) has dropped from 3.11% at the end of April to 2.54%; the weighted average interest rate of 7-day repo (R007) has risen to 4.36% at the end of April. , has now fallen to 2.98%.

Compared with the same period last year, although the current market capital is not very loose, the actual feeling brought about by short-term liquidity easing is very strong under the background that tight balance has become the norm. The above-mentioned trader said: “In the past, the capital level must be tightened in the second half of the year, but it has remained calm so far in May, and it has become more relaxed recently. This is a scenario that was never imagined before.””

However, while the short-term funding rate fell, the long-term funding rate remained high.

The divergence of long-term and short-term money market interest rates has led to a substantial expansion of the money market interest rate term spread, which to a certain extent indicates that the difficulty of medium and long-term capital financing is relatively increased, and the market is still cautious about medium and long-term liquidity expectations. “Recent quarterly and longer-term outflows remain sparse,” the trader said.

On the one hand, short-term funds “cannot come out”, and on the other hand, medium and long-term funds “cannot be financed”. In May, the market funds presented a complicated situation of coexistence of tightness and elasticity.

multifactor disturbance

After entering June, whether the situation of abundant short-term funds can be sustained, and whether the expectation of tight medium and long-term funds has become a reality, are all issues of concern to the market.

Markets have no shortage of concerns about mid-year liquidity. From a historical perspective, due to the assessment of various regulatory indicators by the central bank MPA and the China Banking Regulatory Commission at the end of the quarter, the capital level tends to be tightened, and the mid-year time point is more prone to large fluctuations. At the same time, the excess reserves of banks in the middle of the year tend to be significantly reduced compared with the beginning of the year. The central bank’s first-quarter monetary policy report disclosed that as of the end of March, the over-reserve rate of financial institutions fell to 1.3%, the second-lowest value since the statistics were available. Although the excess reserve rate may have rebounded since May, it may still be at a low level. Under the circumstance that the total amount is not sufficient, seasonal disturbances such as MPA assessment increase, superimposed on strict financial supervision and deleveraging, and financial institutions’ demand for liquidity will increase, which will easily lead to tension between supply and demand and tightening of margins.

Analysts pointed out that the motivation of financial institutions to increase leverage is to arbitrage spreads, mainly including term spreads and credit spreads. The former is realized by using short-term liabilities to connect long-term assets, while the latter shows a tendency to sink asset ratings. In the past round of leverage increase, inter-bank liabilities have expanded significantly, but such liabilities have a short term and there is a greater demand for rolling continuation. With the tightening of banking supervision, interbank, wealth management and other businesses are under great pressure to shrink, the instability of the liability side and the difficulty of management, while the short-term adjustment of the asset side is extremely difficult, and often can only naturally expire. Therefore, in deleveraging In the process, assets and liabilities are prone to gaps, leverage will rise passively first, and the demand for liabilities and funds will rise within a certain period of time. Recently, the competition between banks for traditional deposits has intensified, and the interest rates on inter-bank liabilities such as certificates of deposit have continued to rise, which is the performance of financial institutions’ efforts to compete for liabilities under the background of deleveraging.

In addition, under the pressure of deleveraging, financial institutions are more cautious in their liquidity expectations, which will also lead to an increase in the demand for preventive capital reserves, further aggravating the contradiction between supply and demand of funds.

Not only that, the Fed may raise interest rates again in June, and its impact on foreign exchange liquidity and RMB liquidity cannot be ignored.

Considering the above factors, the uncertainty of the liquidity of the banking system is still relatively large at mid-year. The recent rise in medium and long-term money market interest rates reflects the market’s cautious expectations for inter-quarter liquidity to a certain extent.

The “body feeling” of monetary policy has changed

Although the pressure remains, the positive changes in funding since May should also be taken seriously.

Taken together, there are multiple reasons for the improvement in liquidity in May. First, the RMB has appreciated against the US dollar, which to a certain extent has promoted the improvement of foreign exchange holdings. The China Foreign Exchange Trade System recently stated that it will consider introducing a counter-cyclical factor into the quotation model of the central parity rate of the RMB against the US dollar. This move will help correct depreciation expectations, which is expected to further improve foreign exchange holdings and thus improve the liquidity of the banking system.

Second, deleveraging reduces financing needs. For some banks, under regulatory pressure, if the inter-bank assets are sold or the inter-bank assets are not renewed after maturity, but the liabilities have not yet expired, there will be a surplus of funds, which may not be used for long-term investment, but can be used for long-term investment. Used for short-term lending and repurchase transactions before liabilities mature. In addition, all banks are responding to the pressure of inter-bank debt maturity, and are stepping up to increase the level of reserve funds and reduce long-term investment. There may be excess short-term positions in hand. For non-bank financial institutions, liquidity is also reserved in response to bank redemptions, and these funds may also become short-term funds in the market before the redemption is realized. The abundant supply of short-term funds is not unrelated to this.

Third, the central bank’s willingness to supply liquidity has increased. “It is difficult to describe the direction of monetary policy, but for market institutions, the inflection point of monetary policy in terms of ‘somatosensory’ has appeared.”

The central bank’s first-quarter monetary policy report stated that the central bank’s reverse repurchase operations will be dominated by a 7-day period in the future, and when temporary and seasonal factors are disturbed, it will also choose an opportunity to carry out reverse repurchase operations of other terms. MLF operations will be based on 1-year terms, with other term varieties if necessary, to better meet the medium and long-term liquidity needs of financial institutions.

The risk of semi-annual liquidity fluctuations cannot be ignored, but the market has fully recognized this. Judging from past experience, the more cautious the market expects and the more adequate the response, coupled with the timely stability maintenance operation of the central bank, the performance of funds may not be as tight as expected. Overall, there is little chance of extreme abnormal volatility in liquidity in June.