Chinese Market Expects Another RRR Cut in April; Credit Risk Rising

Background from January:

Reuters: China cash injections could substitute for RRR cut - c.bank economist

Moves by China's central bank to inject over 600 billion yuan ($91.19 billion) in liquidity ahead of the Lunar New Year holidays could substitute for a cut in the amount of cash that banks must hold as reserves, the chief economist at the People's Bank of China(PROC) was quoted a paper as saying on Thursday.

Ma Jun told the China Business News in an interview that PBOC's liquidity injections could "imply a substitute for a cut in banks' reserve retirement ratios (RRR)".

China's RRR cut on March 1 was estimated to release about 700 billion yuan in liquidity, but the PBoC drained more than 1 trillion yuan.

Xinhua: 3月净回笼超万亿 降准预期升温

In early March the central bank lowering quasi release of liquidity of about 700 billion yuan, but the end of March, the central bank in the open market net return of 1.085 trillion yuan in a single month. And drop quasi hedge, the central bank still achieve a net monthly return of more than 300 billion yuan, ending two months of continuously adding liquidity.

In this regard, gold purse chief analyst Xiao Lei believes that the net return to the open market in April RRR opened window. Affected reverse repurchase expired, March drained the open market, reducing market liquidity, which is the April drop quasi expected presence of one reason, but served less than the base currency is the main reason. Before the central bank mainly through the foreign exchange base money, but with dwindling foreign exchange and reduce the central bank base money channels.

It is worth noting that the central bank released data show the end of March, the end of February, foreign currency forward contracts for currency futures contracts and long positions in $ 2.438 billion, $ 28.9 billion of short positions. Xiao Lei believes that the data show that the central bank in managing the exchange rate is weapons, which countries and how much you want to save the city announced its own stock index futures held more than a single empty one is a reason.

Credit risk is rising as well: 信用风险升温 期债波动加剧

Frequent events of default

March 28, Dongbei Special Steel announcement failed to pay in full payment "15 East Steel CP001" principal and interest, constituted a material breach, becoming the first local state-owned enterprises raised bond debt default event. This year, bond defaults just three months last year exceeded the sum, but without excessive pessimism. Nanjing rain this month default run short melt finally obtained main load-bearing support liquidity crisis temporarily lifted. Early breach YABANG investment, Zibo Hongda were deferred payment. In the credit crisis spread on the occasion, the bond credit spreads may widen, need to focus on liquidity shocks generated by a large area of default risk.

Since the early 5-year bond futures premium is more, the recent sharp premium convergence, plus 5-year cash bond market is stronger than the 10-year period, the yield curve is not steep in Treasury futures to be reflected in the contract, the recent 5 year bond futures also strengthened this phenomenon has been amended.

We believe that the current tight market funds is a temporary phenomenon, but in April the financial side fluctuation still not be taken lightly. In the short term, higher inflation, risk appetite, the bond market has some pressing need to closely monitor the impact of credit debt default events. Long-term view, monetary policy has not changed and can hardly be improved on the fundamentals of the bond market will support, debt cattle trend entirely. High and volatile bond market is expected to exacerbate.