HALISTER1: China 7-Day Repo Tightness Should Ease Next Year: Goldman Sachs

China 7-Day Repo Tightness Should Ease Next Year: Goldman Sachs

(Bloomberg) -- China’s 7-day repo rate could dip at end-2017 if nation’s economic growth slows, which is likely to be the case toward end-2016 and in 1Q, according to Goldman Sachs.
  • PBOC may need to loosen underlying liquidity to shore up growth; a tapering of institutions’ repo borrowing could also drive rate lower
  • There’s risk to view of drop in repo rate if inflation surprises on upside vs base forecast of 2.1%/2.2% in 1Q/2Q
    • “A faster rise in inflation would leave the PBOC in a more difficult position to lower interest rates to buffer the expected growth slowdown,” economists including MK Tang write in Nov. 29 note
  • 7-day repo rate has edged up and become more volatile in recent weeks, signaling more hawkish PBOC policy of managing excess liquidity
    • Also reflects shift in structure of interbank repo market, with off-balance sheet vehicles quickly amassing leverage during bond market boom
  • Near-term, PBOC may keep underlying liquidity relatively tight, with occasional nudge higher to encourage deleveraging
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Mk Tang (Goldman Sachs & Co)

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