A rare dislocation in China’s money markets is signaling excess liquidity and
slowing credit demand, as the overnight repo rate fell to a near three-year low,
widening its gap with the PBOC’s seven-day policy rate to the widest since
September 2024. The divergence, despite recent liquidity drains, suggests banks
are flush with cash but struggling to lend. Analysts including Kelvin Lam of
Pantheon Macroeconomics said weak loan demand is weighing on growth, while NCD
yields have dropped to record lows. Liu Jie of Tianfeng Securities warned April
yuan loans could contract, while Yu Liu of Huaxi Securities said the PBOC may
allow tools to mature to absorb liquidity. Samuel Tse of DBS said policy remains
accommodative. The PBOC withdrew 890 billion yuan last month and kept reverse
repo operations minimal, with potential bond issuance seen helping absorb excess
funds.
