Crowded at the Front End

China’s short-term money market rates have fallen below PBOC open market operations (OMO) rates in recent days. If the PBOC sits back and keeps watching, these ultra-loose liquidity conditions will probably continue. However, it is more likely that the central bank will reassert control over money market conditions. How they do so—by cutting official OMO rates, draining liquidity via repurchase agreements, or both—has significant implications for several asset markets. In the long run, however, Beijing needs lower interest rates to reduce the burden of servicing debt on China’s economy.

Posted August 18, 2018
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