China’s Monetary Policy Regime in Transition - Nomura
The Global Markets Research Team at Nomura notes that China’s monetary policy regime is currently experiencing a transition towards a more market-based regime.
Key Quotes
China is changing its monetary policy framework towards a more market-based regime. We believe the 7-day repo rate will become the policy rate as it is more correlated than the overnight repo rate with longer-term interest rates.
The bond market will play a growing role in transmitting monetary policy to the real economy. We expect the government bond market to expand rapidly and further open up to foreign investors.
We expect the bank reserve requirement ratio over time to become more of a macroprudential tool, and at a level much below its current 17%.
Rates strategy: Lower interbank rate volatility, together with the PBoC’s easing bias, should support high grade bonds, initially in the short end but eventually also in the back end. We target 10yr CGBs to rally to 2.5% this year, with risk towards lower yields.
Equity strategy: Better communication, a less volatile interbank rate and greater easing potential under the new framework are all equity-friendly developments.
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