- After the month-end, the rediscount rate in China's bill market showed a slight upward trend. The latest six-month national bank acceptance bill rate is reported in the range of 0.73% to 0.74%, a slight increase of 1 to 2 basis points compared to the end of April. The rebound in short-term bills is relatively more significant, and the market supply and demand are currently in an initial stage of stalemate.
- At the credit situation analysis meeting held by the People's Bank of China (PBOC) in late April, it was clearly required that the credit balance in April should maintain positive growth month-on-month. This compliance window guidance directly weakened the motivation of commercial banks to scale up bill rediscounting at the beginning of the month, leading to a more moderate pace of bill collection by major banks.
- Recently, the central bank has shown a pattern of tightening long-term and loosening short-term liquidity management. In May, the monthly reduction of three-month buyback reverse repos reached 500 billion yuan, the highest in nearly a year. The weakening of long-term fund injections such as the Medium-term Lending Facility (MLF) may transmit marginal revaluation of short-term interest rates to the bill market if the stability of the funding side declines.
Supply and Demand Game and Revaluation of Pricing Range
After the May Day holiday, China's bill market welcomed the first full trading week of supply and demand rebalancing. Observing from trading platform data, bill supply has somewhat recovered compared to before the holiday, while the demand for bill collection by large state-owned commercial banks still exists, but the overall quoting strategy tends to be conservative. This non-aggressive buying directly led to rediscount rates moving away from absolute bottoms. However, since the effective demand for credit in the underlying real economy has not yet shown a substantial turning point, the macro logic of a credit asset shortage has not been disproven. In the absence of high-yield quality credit assets, commercial banks still need to maintain a certain base of bills to cope with regulatory credit assessments, which greatly limits the momentum for bill rates to rebound upwards. In the short term, it is highly likely to maintain a narrow range of fluctuations at low levels.
Central Bank Liquidity Management and Credit Delivery Demands
The pace of counter-cyclical adjustment at the policy level is undergoing slight adjustments. The People's Bank of China (PBOC) previously convened some banks for a credit situation analysis meeting, with the core demand being to maintain the continuity of the financial system's support for the real economy, requiring credit balances to achieve positive month-on-month growth. This regulatory orientation puts structural pressure on banks in credit resource allocation. When substantial corporate loan issuance is insufficient, bill discounting often acts as a regulator of credit scale. If subsequent macroeconomic data confirms that the growth of medium- and long-term corporate loans remains under pressure, the banking system may once again amplify the demand for rediscount bills, thereby suppressing the upward space for interest rates. Therefore, the trend of the bill market will highly depend on the actual landing of real credit data in the coming months.
Adjustment of the Term Structure of Monetary Policy Tools
At the macro liquidity level, the People's Bank of China (PBOC) is trying to correct the previously extraordinary loose funding expectations. By reducing the scale of buyback reverse repos and Medium-term Lending Facility (MLF) injections, with a significant monthly withdrawal of 500 billion yuan in medium- and long-term liquidity, the central bank's policy intention to prevent capital idling and leverage arbitrage is evident. This refined operation strategy of tightening long-term and loosening short-term suggests that the bottom of medium- and long-term funding costs may have been reached. For the bill market, the marginal tightening expectation of the funding side will inevitably increase the holding cost of funds for financial institutions. If short-term reverse repo injections fail to fully offset the gap in long-term fund withdrawals, the central cost of the funding pool will rise, which will slowly transmit to the pricing model of the bill discount market.
