Money market rates have plunged in recent weeks, suggesting that People's Bank of China (PBoC) has de facto started easing, Flash Comment: Weaker yuan suggests PBOC easing bias and widening of trading band . Overall, money market rates are now at their lowest level since May 2013, meaning that most of the de facto monetary tightening PBoC did in H2 13 has now effectively been removed. The decline in money market rates in recent days has in our view been driven by the liquidity impact from PBoC's purchases of USD in its attempt to move USD/CNY higher. It is still unclear to what degree PBoC will attempt to sterilise impact from the USD purchases.
The Chinese money market appears to have moved out of stress. Besides markedly lower money market rates, the spread between unsecured and secured lending in the money market has narrowed and the spread between onshore and offshore interest rates has also narrowed substantially. The swap-government bond spread remains elevated albeit this has also started to narrow in recent days. In addition to PBoC's apparent easing bias, it has also aided the money market that it has passed the important re-financing hurdles in connection with end-2013 and the Chinese New Year on 31 January 2014.
In our view, the surge in new credit in January was largely due to seasonal distortions related to Chinese New Year, see Flash Comment: China - Is renewed surge in credit forcing PBoC to tighten further? Underlying credit flows remain weak with corporate bond issuance and new loans from trust funds in January at less than half of January last year. This suggests that weaker investment demand will continue to weigh on growth. The perceived credit risk for lower quality corporate debt (BBB) has also increased markedly and is now at historically high levels.
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