17 February 2020

The Big Picture: DEBT ACCORD

Asian equities markets, including China, are expected to rise, following gains in bourses in the United States and Europe after an agreement was reached between U.S. Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell to extend the U.S.’ borrowing authority. The pact marks the end of the 16-day U.S. government shutdown, which is good news for China, the biggest overseas holder of U.S. government bonds. But the rebound in Chinese equities could be mild as gains are likely to be capped by revived concerns over the sustainability of the economic recovery in the world’s second-biggest economy. September’s consumer price index unexpectedly rose while overseas sales posted surprising falls. Moreover, the prospect of more curbs to damp home prices is also hanging over Chinese equities. The benchmark Shanghai Composite Index slid 1.8 percent on Wednesday, the biggest loss since Sept. 26. China is due on Oct. 18 to release data on third-quarter economic growth, which may have accelerated to as much as 7.7 percent from 7.5 percent in the previous three months.

Ample cash: The People’s Bank of China sought to reassure the market on Wednesday by rejecting speculation of an interbank liquidity shortage. The central bank has continued to inject cash into the banking system in the past few weeks via open market operations and we are likely to see another week of net fund injections this week. The PBoC sold 10 billion yuan (US$1.6 billion) of reverse repurchase agreements on Tuesday to ease liquidity in the interbank market. A total of 16 billion yuan of central bank bills and 65 billion yuan of reverse repos are maturing this week. On Monday, it rolled over 5.5 billion yuan of three-year bills at a 3.5 percent yield.

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