Global Liquidity Market & Portfolio Commentary - J.P. Morgan Asset Management

Global Liquidity Market & Portfolio Commentary

Contributor Aidan Shevlin

3Q 2019 China market review: CNY weakens as slow growth with mixed inflation inhibit rate cuts

In brief
  • Short maturity yields were range-bound in Q3 to recent low levels and reverse repo yields edged higher as funding conditions remained adequate— especially after the People’s Bank of China (PBoC) cut the reserve requirement ratio (RRR) rate in September.
  • Key economic data weakened in Q3 as escalating trade tensions and slowing domestic activity weighed on exports, industrial production and fixed-asset investments.
  • The PBoC retained a neutral policy bias; investors expect rates to remain broadly unchanged, with risks to the downside.
Market review

Shibor yields edged slightly higher during the third quarter, while yields on Treasury bills and policy bank bonds were range-bound at recent lows. Reverse repo yields trended higher in July before stabilizing ahead of quarter-end. CNY breached the psychologically important level of 7 vs. the USD in early August and hit a decade low of 7.1789 before strengthening slightly.

Economic data showed activity remained muted, with Q2 GDP up 6.2% y/y, the slowest pace in a decade. Stronger capital spending failed to offset weaker consumption, and fixed asset investments, industrial production and retail sales all hit recent cyclical lows. CPI reached a 17-month high, of 2.8% y/y, as pork and vegetable prices spiked higher. In contrast, PPI recorded its first negative reading in two years. Money supply figures were weak, with M2 and new loans both slowing. Despite currency weakness, FX reserves remained broadly stable.

In mid-September, the PBoC cut the RRR by 0.5%, to 13%, the lowest level in 12 years. Subsequently, medium-term lending facility (MLF) operation sizes and interest rates were unchanged, reducing expectations of further rate cuts. Meanwhile, reforms to the Loan Prime Rate (LPR) should be marginally supportive for state-owned enterprises and private firms.

Source: Bloomberg: data as of September 30, 2019.

Portfolio commentary

During the third quarter, the RMB Liquidity Strategy maintained a long duration, locking in higher yields in longer tenor securities to offset an expected decline in yields. The strategies focused on a barbell policy, maintaining high cash balances while investing in 6- to 12-month fixed-rate securities.

The strategy continues to be diversified, with key holdings in negotiated time deposits, Shanghai Stock Exchange repos, policy bank bonds and negotiated certificates of deposit. Liquidity and credit quality remain high. The strategy’s yields edged higher during the quarter.


The combination of escalating trade tensions and slowing domestic activity implies a further slowdown in Chinese economic growth. Higher CPI and negative PPI have created a dilemma for the PBoC, limiting its ability to ease monetary policy further. In the interim, the renminbi is bearing the strain and economists expect the currency to weaken further. Given this backdrop, it is likely interest rates will remain low and stable for the foreseeable future.

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