(Bloomberg) -- China’s money market is signaling expectations of bold monetary easing by Beijing as it braces for the risk of trade tensions with the US under a Donald Trump administration.
The nation’s one-year interest-rate swaps, a popular hedging tool sensitive to rate expectations, fell to the lowest since May 2020 this week. China’s benchmark bond yields also tumbled to a fresh record low after the Politburo pledged “moderately loose” monetary policy in 2025 in its first policy pivot in nearly 14 years.
“The lowering of IRS and bond yields is a reflection of the anticipated further easing ahead,” said Wee Khoon Chong, a strategist at BNY in Hong Kong. “The market is pricing aggressively but certainty higher probability for policy rates to go lower from current levels.”
The People’s Bank of China was widely expected to reduce banks’ reserve requirement ratio by year-end to revive the economy. And the Politburo’s latest forceful pledges on stimulus have prompted some to forecast bigger RRR cuts next year along with an increase in government bond purchases by the central bank.
All eyes are now on the two-day Central Economic Work Conference that runs through Thursday on how policymakers plan to implement the pledges made earlier this week. The meeting will likely discuss setting a growth goal for 2025, although specific figures will only be announced in March during the annual meeting of the legislature.
For one-year IRS, “the next level to watch are 2020 lows and a break below those levels cannot be ruled out upon materialization of rate cuts,” said Frances Cheung, strategist at Oversea-Chinese Banking Corp. “Chance is high for a near-term RRR cut. While the timing of rates cuts is uncertain, we expect a total of 40 basis points of cuts between now and end-2025.”
©2024 Bloomberg L.P.