Bank of America (BofA) noted a sharp increase in repo rates in the week of January 13 due to higher liquidity demand fueled by tax payments and limited funding provided by the People's Bank of China (PBoC ).
The liquidity squeeze was very evident on January 16, the day after the tax payment date, with DR007 and R007 reaching 2.34% and 4.19%, respectively.
The PBoC maintained its stance of protecting exchange rate stability, meaning that the tightness of liquidity (RMB) is being felt in the offshore market as well.
On January 9, the central bank announced that it would issue RMB60 billion of 6-month bills in Hong Kong, a significant increase compared to previous releases. The coupon rate of 3.4% was significantly higher than the December issuance, reflecting CNH's tight liquidity and low investor demand.
The December FX settlement balance with bank clients fell further to a deficit of US$10.5 billion, the first deficit reading since July 2024. A key change from the previous month was a sharp increase in USD demand for trade services. Reports also suggest that domestic importers have been actively buying USD through FX forwards to hedge against the risk of tariffs in recent weeks, which has been putting upward pressure on points. forward.
On January 13, the PBoC increased the cross-border macroprudential parameter to 1.75 from 1.50. This move allows domestic corporations and Financial Institutions (FIs) to do more cross-border lending.
Given the widening interest rate gap between China and overseas, BofA believes this is a symbolic move by the PBoC to reinforce market expectations on FX.
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