Market Liquidity Boosts Confidence Amid Frequent Policies

• News
• 2024-09-06

Abstract

During the week of October 14th to 18th, the First Financial Research Institute's China Financial Conditions Daily Index averaged -1.56, a decrease of 0.58 from the previous week and a decrease of 0.33 from the beginning of the year. From the perspective of the index's constituent indicators, last week's liquidity easing and narrowing credit spreads were the main factors driving the index down. Looking at the monetary indicators, the central bank conducted a large amount of reverse repurchase operations last week, leading to a decline in major money market interest rates and a reduction in liquidity differences between banks and non-bank financial institutions. From the bond indicators, funds flowed back into the long-term government and credit bond markets, with credit spreads narrowing significantly. From the stock market indicators, the enthusiasm in the A-share market remained high, with leveraged financing continuing to rise.

During the week of October 14th to 18th, thanks to the central bank's large-scale short-term reverse repurchase operations, the overall market liquidity was loose, and major money market interest rates generally fell, alleviating the liquidity stratification phenomenon between non-bank and bank institutions. In the 7-day repurchase rate, the average rates for R007 and DR007 last week were 1.85% and 1.61%, respectively, down by 25.02bp and 8.45bp from the previous week. The difference between R007 and DR007 decreased from 40.37bp to 23.8bp, and as the central bank increases its care for market liquidity, there is still room for the difference between the two to decrease in the later period. Recently, various departments have frequently issued policies, which are conducive to boosting market confidence. On October 17th, five departments jointly held a press conference to introduce the situation related to promoting the stable and healthy development of the real estate market. At the meeting, Minister Ni Hong of the Ministry of Housing and Urban-Rural Development pointed out that the five departments will take joint action to launch a policy "combination punch" to promote the market to stop falling and stabilize. On October 21st, the National Interbank Offered Rate Center announced that the 1-year LPR is 3.1%, and the LPR for more than 5 years is 3.6%, both down by 25 basis points from the previous period. This is the third adjustment of LPR within the year, and since the beginning of the year, the 1-year LPR has accumulated a decrease of 35 basis points, and the LPR for more than 5 years has accumulated a decrease of 60 basis points.

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During the week of October 14th to 18th, both the bond market issuance and net financing increased compared to the previous week. Among them, the total bond market issuance was 1.39 trillion yuan, an increase of 67.5073 billion yuan from the previous week; the bond market net financing was 28.9948 billion yuan, an increase of 19.1148 billion yuan from the previous week. From the perspective of financing structure, last week's government bond issuance accelerated, with a single-week net financing of 31.216 billion yuan, and the entire government sector bond net financing was 35.0121 billion yuan; in contrast, last week's corporate bonds, corporate bonds, medium-term notes, short-term financing, and targeted tools respectively repaid 517.7 million yuan, 1.7583 billion yuan, 1.2855 billion yuan, 5.3657 billion yuan, and 565.1 million yuan, asset-backed securities net financing was 1.018 billion yuan, and the non-financial corporate sector repaid 8.4743 billion yuan. From the perspective of the secondary bond market, last week's funds returned to the long-term bond and credit bond markets.

During the week of October 14th to 18th, the total financing of A-shares was 1.708 billion yuan, an increase of 1.068 billion yuan from the previous week. Looking at the year, this year's A-share cumulative financing of 23.399 billion yuan is weaker than the same period in previous years. From the secondary market, last week's Shanghai Composite Index rose by 1.5%, the SME Index rose by 3%, and the ChiNext Index rose by 4.8%. The price-earnings ratio and trading volume of A-shares fluctuated significantly, with the average daily trading volume maintaining a high level of 1.6 trillion. In October, the difference between A-share financing and short selling showed a rapid upward trend, rising from 1.37 trillion yuan to 1.6 trillion yuan, accounting for 1.96% of the total market value of A-shares.

Main Text

I. Overview of China's Financial Conditions Index

During the week of October 14th to 18th, the First Financial Research Institute's China Financial Conditions Daily Index averaged -1.56, a decrease of 0.58 from the previous week and a decrease of 0.33 from the beginning of the year.

From the perspective of the index's constituent indicators, last week's liquidity easing and narrowing credit spreads were the main factors driving the index down. Looking at the monetary indicators, the central bank conducted a large amount of reverse repurchase operations last week, leading to a decline in major money market interest rates and a reduction in liquidity differences between banks and non-bank financial institutions. From the bond indicators, funds flowed back into the long-term government and credit bond markets, with credit spreads narrowing significantly. From the stock market indicators, the enthusiasm in the A-share market remained high, with leveraged financing continuing to rise.

II. Money MarketDuring the week of October 14th to 18th, the market's overall liquidity was relaxed due to the central bank's substantial conduct of short-term reverse repurchase operations. The main money market interest rates generally declined, and the liquidity stratification phenomenon between non-bank and banking institutions was alleviated. In the 7-day repurchase rate, the average rates of R007 and DR007 for the previous week were 1.85% and 1.61%, respectively, which decreased by 25.02 basis points (bps) and 8.45 bps compared to the previous week. The spread between R007 and DR007 narrowed from 40.37 bps to 23.8 bps. As the central bank increases its care for market liquidity, there is still room for the spread between the two to decrease in the later period.

Recently, various ministries and commissions have frequently introduced policies, which are conducive to boosting market confidence. On October 17th, five ministries and commissions jointly held a press conference to introduce the situation of promoting the stable and healthy development of the real estate market. At the meeting, the Minister of Housing and Urban-Rural Development, Ni Hong, pointed out that the five ministries and commissions will take joint action to launch a policy "combination punch" to promote the market to stop falling and stabilize.

On October 21st, the National Interbank Offered Rate (LPR) Center announced that the 1-year LPR is 3.1%, and the LPR for terms above 5 years is 3.6%, both of which have decreased by 25 basis points compared to the previous period. This is the third adjustment of LPR within the year. So far this year, the 1-year LPR has accumulated a decrease of 35 basis points, and the LPR for terms above 5 years has accumulated a decrease of 60 basis points.

1. Money Market Transaction Volume and Interest Rates

During the week of October 14th to 18th, the market's overall liquidity was relaxed. In terms of transaction volume, the average transaction volume of the interbank market's repurchase with collateral was 7.93 trillion yuan, an increase of 261.853 billion yuan compared to the previous week.

Looking at the cost of funds, the main money market interest rates declined last week, and the decline was quite significant. In the overnight repurchase rate, the average rates of R001 and DR001 for the previous week were 1.56% and 1.43%, respectively, which decreased by 9.94 bps and 9.57 bps compared to the previous week. In the 7-day repurchase rate, the average rates of R007 and DR007 for the previous week were 1.85% and 1.61%, respectively, which decreased by 25.02 bps and 8.45 bps compared to the previous week.

The liquidity stratification phenomenon that previously existed between non-bank and banking institutions has been significantly alleviated, mainly reflected in the significant decline of R007 rates, which led to the narrowing of the spread between R007 and DR007. Last week, the spread between R007 and DR007 narrowed from 40.37 bps to 23.8 bps. As the central bank increases its care for market liquidity, there is still room for the spread between the two to decrease in the later period.

2. Central Bank's Open Market Operations

During the week of October 14th to 18th, the central bank increased the intensity of short-term fund injections. Among them, from October 16th to 18th, the central bank's daily reverse repurchase injection scale reached 642.4 billion yuan, 13.26 billion yuan, and 10.84 billion yuan, respectively. The total reverse repurchase injection for the week rose to 971.2 billion yuan, with reverse repurchase maturity of 346.9 billion yuan, resulting in a net injection of funds of 624.3 billion yuan.

On October 17th, five ministries and commissions jointly held a press conference to introduce the situation of promoting the stable and healthy development of the real estate market. At the meeting, the Minister of Housing and Urban-Rural Development, Ni Hong, pointed out that the five ministries and commissions will take joint action to launch a policy "combination punch" to promote the market to stop falling and stabilize. The "combination punch" can be summarized as four cancellations, four reductions, and two increases:Four Cancellations: Localities implement policies tailored to their cities, canceling purchase restrictions, canceling sale restrictions, canceling price limits, and canceling the standards for ordinary and non-ordinary residential properties.

Four Reductions: Reduce the interest rates on housing provident fund loans, reduce the down payment ratio for housing loans, reduce the interest rates on existing loans, and reduce the tax burden for "selling old and buying new" housing exchanges.

Two Increases: Newly implement 1 million urban village renovations and dilapidated housing renovations, and increase the credit scale of "white list" projects to 4 trillion yuan before the end of the year.

On October 21, the National Interbank Offered Rate (LPR) was announced by the National Interbank Funding Center, with the 1-year LPR at 3.1% and the LPR for terms over 5 years at 3.6%, both down by 25 basis points from the previous period. This is the third adjustment of the LPR within the year, with the 1-year LPR having accumulated a decrease of 35 basis points and the LPR for terms over 5 years having accumulated a decrease of 60 basis points since the beginning of the year.

III. Bond Market

From October 14th to 18th, both the issuance and net financing of the bond market increased compared to the previous week. Specifically, the total issuance of the bond market was 1.39 trillion yuan, an increase of 67.5073 billion yuan from the previous week; the net financing of the bond market was 28.9948 billion yuan, an increase of 19.1148 billion yuan from the previous week. Looking at the financing structure, last week saw an acceleration in the issuance of government bonds, with a weekly net financing of 31.216 billion yuan, and the net financing of government department bonds reached 35.0121 billion yuan; in contrast, last week corporate bonds, corporate notes, medium-term notes, short-term financing, and targeted instruments respectively had net repayments of 0.5177 billion yuan, 1.7583 billion yuan, 1.2855 billion yuan, 5.3657 billion yuan, and 0.5651 billion yuan, asset-backed securities had a net financing of 1.018 billion yuan, and the non-financial corporate sector had a net repayment of 8.4743 billion yuan.

From the perspective of the secondary bond market, last week funds returned to the long-term bond and credit bond markets. Last week, the yields on 5-year, 10-year, 20-year, and 30-year government bonds decreased by 5.44 basis points, 3.59 basis points, 2.31 basis points, and 2.59 basis points, respectively. The yields on credit bonds also fell significantly, with the yields on 5-year corporate bonds, corporate notes, and asset-backed securities in the AAA category decreasing by 19.15 basis points, 19.91 basis points, and 14.06 basis points, respectively, and leading to a narrowing of credit spreads.

1. Bond Market Issuance

From October 14th to 18th, both the issuance and net financing of the bond market increased compared to the previous week. Specifically, the total issuance of the bond market was 1.39 trillion yuan, an increase of 67.5073 billion yuan from the previous week; the net financing of the bond market was 28.9948 billion yuan, an increase of 19.1148 billion yuan from the previous week.

Looking at the financing structure, last week's net financing in the bond market was mainly concentrated in the government sector. From the perspective of the government sector, last week saw an acceleration in the issuance of government bonds, with a weekly net financing of 31.216 billion yuan, local government general bonds and special bonds respectively had net financing of 1.0173 billion yuan and 2.7788 billion yuan, and the net financing of government department bonds reached 35.0121 billion yuan. From the financial sector, last week's interbank certificates of deposit had a net repayment of 6.533 billion yuan, and policy bank bonds had a net financing of 9 billion yuan, with the financial sector having a net financing of 2.457 billion yuan. From the non-financial corporate sector, last week corporate bonds, corporate notes, medium-term notes, short-term financing, and targeted instruments respectively had net repayments of 0.5177 billion yuan, 1.7583 billion yuan, 1.2855 billion yuan, 5.3657 billion yuan, and 0.5651 billion yuan, asset-backed securities had a net financing of 1.018 billion yuan, and the non-financial corporate sector had a net repayment of 8.4743 billion yuan.Looking at the year-to-date perspective, the recent issuance pace of government bonds and local government special-purpose bonds has accelerated, driving the proportion of net financing from government bonds to rise rapidly. As of October 20th, the net financing from government bonds accounted for 54.81% of the total financing; the proportion of net financing from financial sector bonds was 35.3%, and the proportion of bond financing from the non-financial corporate sector was 9.89%.

Compared to the same period last year, the overall net financing scale of the bond market has expanded significantly this year. As of October 20th, the year-on-year growth rate of the government sector's bond balance was 16.6%, which is an increase of 3.6 percentage points compared to the same period in 2023; the year-on-year growth rate of the financial sector's bond balance was 12.7%, which is an increase of 6.6 percentage points compared to the same period in 2023; the year-on-year growth rate of the non-financial corporate sector's bond balance was 4.8%, which is an increase of 6.1 percentage points compared to the same period in 2023.

2. Bond Yield Trends

1) Interest Rate Bonds

During the week of October 14th to 18th, the yields of government bonds of various maturities fluctuated. Looking at the short end, the yield of the 1-month government bond decreased by 0.52 basis points, while the yields of the 3-month, 6-month, and 1-year government bonds increased by 0.73 basis points, 6.14 basis points, and 3.2 basis points, respectively. Looking at the medium to long end, market funds flowed back into the long-term bond market, and the yields of the 5-year, 10-year, 20-year, and 30-year government bonds decreased by 5.44 basis points, 3.59 basis points, 2.31 basis points, and 2.59 basis points, respectively.

Regarding the term spread of government bonds, during the week of October 14th to 18th, the yield difference between the 10-year and 1-year government bonds remained around 68 basis points, a decrease of 6.8 basis points from the previous week's average. Looking at the year-to-date perspective, the term spread of government bonds has shown a fluctuating trend, and as of October 18th, the spread between the 10-year and 1-year government bonds has increased by 21.23 basis points compared to the beginning of the year.

2) Credit Bonds

During the week of October 14th to 18th, the yields of credit bonds fell significantly. Among AAA-rated bonds, the yields of 5-year corporate bonds, corporate bonds, and asset-backed securities decreased by 19.15 basis points, 19.91 basis points, and 14.06 basis points, respectively. Among AA-rated bonds, the yields of 5-year corporate bonds, corporate bonds, and asset-backed securities decreased by 11.95 basis points, 12.02 basis points, and 12.93 basis points, respectively.

The spread between credit bonds and government bonds also fell in tandem. Last week, among AAA-rated bonds, the spreads between corporate bonds, corporate bonds, and asset-backed securities and government bonds decreased by 13.71 basis points, 14.47 basis points, and 8.62 basis points, respectively. Among AA-rated bonds, the spreads between corporate bonds, corporate bonds, and asset-backed securities and government bonds decreased by 6.51 basis points, 6.58 basis points, and 7.49 basis points, respectively.

IV. Stock MarketDuring the week of October 14th to 18th, the total financing amount in the A-share market was 1.708 billion yuan, an increase of 1.068 billion yuan compared to the previous week. Looking at the year-to-date figures, the cumulative financing in the A-share market this year reached 233.99 billion yuan, which is weaker than the same period in previous years.

From the perspective of the secondary market, last week, the Shanghai Composite Index rose by 1.5%, the Small and Medium Board Index increased by 3%, and the ChiNext Index surged by 4.8%. The A-share market's price-to-earnings ratio and trading volume fluctuated significantly, with the average daily trading volume still high at 1.6 trillion yuan. In October, the difference between A-share financing and securities lending showed a rapid increase, rising from 1.37 trillion yuan to 1.6 trillion yuan, accounting for 1.96% of the total market value of A-shares.

1. Primary Market

During the week of October 14th to 18th, the total financing amount in the A-share market was 1.708 billion yuan, an increase of 1.068 billion yuan compared to the previous week. Looking at the 4-week rolling average data of A-share financing, since the fourth quarter of last year, A-share financing has been at a relatively low level. Year-to-date, the cumulative financing in the A-share market this year reached 233.99 billion yuan, which is weaker than the same period in previous years.

2. Secondary Market

During the week of October 14th to 18th, the main A-share indices rose, with the Shanghai Composite Index increasing by 1.5%, the Small and Medium Board Index rising by 3%, and the ChiNext Index surging by 4.8%. Year-to-date, the Shanghai Composite Index has cumulatively increased by 9.6%, the Small and Medium Board Index has cumulatively risen by 5.9%, and the ChiNext Index has cumulatively jumped by 16.1%. The market's risk preference, measured by the year-on-year growth rate of the index minus the yield of the 10-year government bond, has shown a clear rebound.

In terms of trading volume, last week, the average daily trading volume of A-shares was 1.65 trillion yuan, a decrease of 36.5% compared to the previous week. Regarding the price-to-earnings ratio, the weighted average P/E ratio of A-shares last week was 16.46, a decrease of 3.6% compared to the previous week. Recently, the difference between A-share financing and securities lending has risen rapidly, increasing from 1.37 trillion yuan to 1.6 trillion yuan, accounting for 1.96% of the total market value of A-shares.