(Bloomberg) -- Having slashed key rates in August, the PBOC may deliver a cut to banks’ reserve requirement as soon as next month, according to Citigroup.

• “Our liquidity analysis suggests that the threshold conditions for a RRR cut may be met in September, and we watch closely if the PBOC announces an RRR cut on Sep. 5 or Sep.15 -- the usual RRR reassessment dates,” the bank’s strategists including Gaurav Garg wrote in a note
  • A smaller 25bps RRR cut could be about keeping interbank liquidity stable, while a larger 50bps RRR cut could be partially offset by lower rollover of PBOC’s policy loans, the so-called MLF, given heavy maturities in coming months
  • This could bring some more support for loan extensions but the liquidity implications could be rather neutral instead of significantly lowering the interbank repo rates
  • NOTE: A total of 2.6 trillion yuan of MLF loans will mature in September-December, according to Bloomberg-compiled data
• Bond supply pressure seems not as aggressive as previously estimated as fiscal stimulus lags expectations
  • State Council meeting this week announced the plan to issue 500b yuan of special local government bonds, which is only one-third of the estimated 1.5t yuan of the total remaining debt ceiling
  • The policy banks did not show urgency in issuing more bonds to fund infrastructure projects. Issuance in Jul-Aug still tracks behind Citi’s estimated path towards 0.7t yuan additional funding for 2H
• Sees 10y CGB yield in 2.55-2.75% range as the market and monetary policy may enter a phase of assessing the policy effects
• For the yuan, regulatory attention to FX is on the rise, but unlikely to push back on fundamentally driven moves
  • Long USDCNH via options expecting to push toward 6.95

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