At its Politburo meeting yesterday, China indicated that it would take a “moderately loose” stance for monetary policy in 2025. This is the first time since 2011 that such language has been used to describe policy. We also note that the tone for fiscal policy has also shifted to “more proactive”, a more aggressive term compared to “proactive” previously. More supportive messaging from the authorities is clearly positive for sentiment with HK’s stock market rallying while the RMB showed some signs of stability. From the rates perspective, given that the bond market was closed before the announcement was made, the reaction is seen in the onshore IRS and the NDIRS curves. Across the tenors, rates are down by around 4bps.
Our view on CNY rates has not changed. The latest comments only cement our view that monetary policy is likely to be very accommodative and we expect some 85bps of cuts in the 1Y LPR over the coming year. More RRR cuts are also in the offing to, anchoring front-end CNY rates and CGB yields in the process. We are less confident on the long end and on the curve. Over the past few months, the 2Y/10Y of the CGB curve has stopped steepening as the longer-tenors yields got dragged lower alongside shorter-term ones. There seems to be some resistance to the curve in the 60-80bps region. Until more concrete plans for fiscal expansion kicks in, steepening may be on pause for a while more.
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