On China via Andy Lees of UBS:
The yields on two sets of bills moved in opposite directions. The PBOC issued 3 month bills at a yield 4bpts higher than the prevailing rate, whilst 3 year bill yields fell 2bpts. “The divergence underscores the extent to which monetary conditions have tightened in the last few weeks, particularly after the implementation of higher reserve requirement ratios on May 10, which tied up an estimated CNY300bn” according to Reuters. Liquidity has tightened considerably. Overnight repo rates have risen from 1.3% a month ago to 1.55% now, which is now higher than 3 month bill rate at today’s auction of 1.4492%. Banks have been eager to buy the longer dated bills and lock up money for three years at a premium, but to increase its flexibility the central bank is now trying to revive interest in shorter term bills but is having to pay up to do so. The curve continues to flatten.
A flatter curve in China is harbinger of slowing growth. As I said earlier today, China is trying to douse their inflation fire. The question is whether the Chinese can prevent a hard landing given the asset bubble that has formed in property and the large amounts of fixed investments that remain underutilized.