This week welcomes the tax payment deadline, coinciding with the cross-month funding needs, and a large amount of reverse repurchase agreements maturing. Will the fund situation shift from loose to tight?

Industry institutions believe that looking ahead, in terms of funding, large fund demand towards the end of the month may lead to an increase in the DR007 rate. Currently, major banks are still strongly supplementing medium and long-term liabilities through issuing certificates of deposit, and there may still be some pressure on the liability side of banks. From a medium-term perspective, with the government increasing efforts, the issuance of government bonds in November and December may disrupt the fund situation once again.

The phenomenon of liquidity stratification is evident, with potential increase in fund demand at the end of the month.

Today, the central bank conducted a 208.9 billion yuan reverse repurchase operation, with a bid rate of 1.5%. Due to the 42.7 billion yuan reverse repurchase maturing today, a net injection of 166.2 billion yuan was realized on the same day.

The significant increase in the amount of reverse repurchase maturing this week, specifically, the central bank's open market operations will see 994.4 billion yuan of reverse repurchase maturing this week, of which 42.7 billion yuan will mature on Monday, 68.3 billion yuan on Tuesday, 642.4 billion yuan on Wednesday, 132.6 billion yuan on Thursday, and 108.4 billion yuan on Friday, all with a 7-day term.

Of significant note is the recent clear liquidity stratification. On the supply side, the net lending supply maintained a high level in the banking system, especially with major banks as the main suppliers, and the demand for funds from non-bank institutions is also evident.

Huaxi Macro Fixed Income pointed out that the phenomenon of fund stratification has not significantly eased. The borrowing costs for non-bank interbank funds are still slightly high, with R007 and DR007 spreads around 20-30 basis points, while at non-special times from April to September, the spread between the two was basically within 10 basis points. The fund situation has gradually shifted from "banks in need of money, non-banks with money" to the phase of "banks with money, non-banks in need of money". The reasons behind this are: firstly, the previous prohibition on manual interest supplementation has led to the end of deposit migration (mainly from corporate demand deposits), secondly, the scale of wealth management has not returned to the level at the end of September, and thirdly, after the interest rate cut, the arbitrage space for short-term credit bonds has also expanded, driving the increase in fund demand.

"After the cross-quarter, there has been some easing of funding pressure, with the DR007 interest rate declining. However, recently the stock market has been hot, with a significant increase in volume, while the bond market has undergone adjustments, bond funds facing redemptions, non-bank fund demand growth, leading to R007 still maintaining at a high level, R-DR interest rate spread increasing, and severe liquidity stratification phenomenon." said Jin Yi from Guohai Fixed Income.

"In the short term, there is some fluctuation in the funding conditions. On one hand, the willingness of financial institutions to lend short-term funds has increased after the holiday, while demand has somewhat weakened. On the other hand, there has been some capital returning post-holiday, disturbances from factors such as government bond issuances. However, the open market operations of the central bank remain flexible, with market funding conditions fluctuating only slightly." Zhou Maohua, a macro researcher from the Financial Markets Department of China Everbright Bank, told the Caixin reporter that, judging by the fluctuation of market interest rates around the policy interest rate, market liquidity remains reasonably loose.

Zhejiang Shanghao believes that the exacerbation of fund stratification may be due to a relative decrease in the financing capabilities of fund recipients compared to the previous period, combined with seasonal data. Specifically, the financing capabilities of rural commercial banks, wealth management, and money market funds have declined slightly. Lastly, taking into account the significant increase in GC001 and R001 recently, it can be inferred that the decline in the financing capabilities of money market and wealth management is more critical to the entire fund stratification.

"In the primary market, over the past week, we have seen continuous price increases for certificates of deposit, reflecting the phase characteristic of 'MLF maturity leading to continued restrictions on bank medium- and long-term liquidity, major banks still have strong demands to issue CDs to supplement medium- and long-term liabilities,' and also indicates that there may still be certain pressures on the liability side of banks." Zhejiang Shanghao Macro stated.

Jin Yi believes that looking ahead, in terms of funding, there is a significant demand for funds at the end of the month, with DR007 usually rising, facing some pressure in funding conditions. From a medium-term perspective, with fiscal efforts, in November-December, there may be additional government bond issuances, which could potentially disrupt the funding conditions again.

Focus on the scale of this week's MLF rollovers and selective RRR cuts before the end of the year.

This Friday, the central bank will conduct the one-year medium-term lending facility (MLF) operation. The market is focusing on the scale of this MLF rollover, while also anticipating a targeted RRR cut before the end of the year.

Institutions indicate that there is a large amount of MLF maturing in the fourth quarter of this year, totaling 3.69 trillion yuan. A 50 basis points RRR cut can hedge against the large amount of upcoming maturing MLF, supplementing liquidity and helping reduce bank funding costs. The decrease in reverse repo rates and deposit rates can more directly and efficiently reduce costs for the liability side of banks.

Central Bank Governor Pan Gongsheng recently revealed at the 2024 Financial Street Forum Annual Meeting that he expects to further reduce the reserve requirement ratio by 0.25 to 0.5 percentage points before the end of the year based on market liquidity conditions; lowering the policy interest rate reverse repurchase operation rate by 0.2 percentage points; and lowering the medium-term lending facility rate by 0.3 percentage points.

"Considering the need to promote financial institutions to increase support for the real economy, implement incremental fiscal policies, and address seasonal disturbances by the end of the year, there may be certain fluctuations in the funding market. In order to make adjustments across cycles, it is not ruled out that the Central Bank may once again cut the deposit reserve ratio. In addition, there is still room for interest rate tools at present, but the constraints are also quite obvious. The Central Bank needs to adjust based on the recovery of the real economy and price situation, while considering both domestic and international balance." Zhou Maohua said.