CNY Swaps: Busy 5y flow after PBOC's surprising RRR cut; 1s/5s flatter

PBOC surprised the market by its 25bps RRR cut late on Friday. 5y swaps saw good amount of flow and 1s/5s NDIRS flattened out.

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  • PBOC RRR cut surprises: More than CNY500bn injection

  • Busy 5y forward flows; 1s/5s NDIRS flatter

  • New issues


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PBOC RRR cut surprises: More than CNY500bn injection

On Friday after market close, the PBOC unexpectedly announced a 25bp RRR cut, effective 27 March, to midsized and large banks, while small banks that are currently subject to 5% RRR are exempted. The cut results in large and midsized banks to hold 10.75% and 7.75% of the deposit as reserve. The move was a surprise to the market as the central bank had already inject earlier in the week net CNY281bn into the system via its regular MLF operations


Cutting the RRR has been PBOC’s favourable and effective tool to supply long-term liquidity to support the real economy. Indeed, following series of cuts since the beginning of 2-18, the weighted average/effective RRR has come down from level at 14.9% to 7.6% after the latest cut. As of February, total deposits excluding fiscal deposits were at CNY258trn, implying that the RRR cuts since 2018 have released nearly CNY19trn long-term liquidity into the system. Banks such as BNP Paribas and Societe Generale estimated that this cut would inject at least CNY500bn of long-term liquidity into the banking system.


The central bank therefore wasn’t in a hurry to cut interest rate. It therefore kept 1- and 5-year loan prime rate unchanged at 3.65% and 4.3% respectively, as had been predicted by SG.


BNP believes that the RRR cut was the central bank’s reaction to perhaps some structural liquidity shortage at some banks, which is evidenced by the recent wobbles in interbank liquidity, such as the rise in repo fixings after the Spring Festival, and overnight repo reaching 15% twice. The shortage has been in turn driven by seasonal factors as liquidity is usually tighter around quarter-end, and stronger demand for credit. In January and February, M2 growth was 12% year-on-year. In addition, issuance of special Local


Elsewhere, both SG and BNP share the same view that the timing of this RRR coincided with the recent jitters in US market after the failure of Silicon Valley Bank, and with fears over the potential collapse of First Republic Bank and Credit Suisse. BNP said these might have prompted the PBOC to take pre-emptive measures to ease domestic concerns for liquidity, while SG reckoned “a small but unexpected easing move is not a bad idea when markets need some mental support”.



Busy 5y forward flows; 1s/5s NDIRS flatter

Players scrambling to enter into 3m5y after the surprising RRR cut. It traded down to 2.81%, or down about 5.5bps from Friday’s close. 5-year outright traded briefly at 1.5bps lower of 2.8%


1s/5s NDIRS flattened out by 1.75bps to 43.25bps, despite some good-sized receiving in 1-year at down to 3bps lower of 2.34%. According to a dealer, there have been some attempts to close out prior paid positions in 1-year too.