Dear investors, in this market analysis, I would like to offer you a very important reminder:We believe that the unexpectedly loose liquidity since March-April 2026 has entered an important observation window, and the liquidity inflection point is getting closer and closer.

I will elaborate in three parts:First, the current true state of liquidity; second, the central bank's policy stance, which has already been slightly adjusted; third, how to understand the boundaries of the central bank's policy balance, and how to judge the triggering factors and verification indicators of the liquidity inflection point.

I. Current Status: Interbank and non-bank liquidity are both ample.

Regarding the current liquidity situation, we mainly observe it from two dimensions: interbank and non-bank. Both dimensions point to the current liquidity being at an extremely loose level in recent years.

The first dimension is interbank liquidity.First, for the first time since September 2023, in the post-pandemic era, the DR007 rate has remained below the central level of the 7-day reverse repo policy rate for an extended period. Second, the 90-day standard deviation of the DR007 rate is currently at its lowest level in the past decade. Based on these two data points, we can objectively say that the past two months have been a period of "low and stable" liquidity that we have seen in recent years, meaning that the absolute interest rate level is below the policy central level, while the volatility of interest rates is also at a low point in recent years.

The second dimension is non-bank liquidity, which is also currently very loose.We see two key data points: First, the annualized growth rate of household deposit migration has reached its highest level in the past decade or so, exceeding the peak values of previous cycles, indicating a high level of household deposit migration. Second, the corresponding result is that the total dynamic sum of non-bank deposits over 12 months has reached its highest point since statistics began in 2008, surpassing not only the peak during the period of idle funds in 2015, but also the level during the surge in non-bank deposits on September 26, 2024.

Therefore, against the backdrop of both loose interbank and non-bank liquidity, bond yields have declined and stock market valuations have continued to rise over the past two months, objectively resulting in a bull market in both stocks and bonds. Here I would like to add that we have been making a judgment since last year: if the main logic is the shift of household deposits, then the central bank will most likely take hedging measures, and it will be difficult for a bull market in both stocks and bonds to occur under such circumstances.However, the unique aspect of this round of market activity lies in the fact that the liquidity injections from the official central bank and the household sector, which acts as a "private central bank," resonated with each other, without any offsetting effects. Therefore, since March and April, the market has entered a phase dominated by the resonance of these two liquidity sources, ultimately leading to a bull market in both stocks and bonds.

II. Policy Signals: The Central Bank's Stance Has Been Marginally Adjusted

The current state of easing may be nearing its limit, and we have already observed marginal changes in the central bank's policy stance.From the perspective of open market operations: since March, outright reverse repos have maintained a net withdrawal of funds; the MLF (Medium-term Lending Facility) in April has also begun to be renewed in smaller amounts. From the perspective of official statements, the first-quarter monetary policy implementation report has removed phrases related to "interest rate cuts and reserve requirement ratio reductions," instead emphasizing "strengthening the coordination between monetary and fiscal policies."

At the same time, judging from past economic cycle patterns,During periods of rising PPI, the central bank rarely increases liquidity injections. Instead, it tends to maintain stable liquidity levels initially, and then gradually tighten liquidity as the economic recovery becomes more confirmed, based on changes in market volatility.

III. Understanding the Framework: How to grasp the boundaries of the central bank's easing and tightening policies, and how to verify them?

Regarding the central bank's policy orientation, we can understand it as a "balance scale," with clear boundaries on both sides. What are the boundaries of easing?The core issue is the idle circulation of funds. If financial institutions engage in excessive idle circulation, even leading to asset price bubbles, it likely indicates that the limits of monetary easing have been reached. In terms of metrics, we can focus on the interbank bond market leverage ratio, which directly reflects the extent to which financial institutions are leveraging for arbitrage.

What is a tight boundary?Against the backdrop of the current economic transformation from old to new growth drivers, a crucial boundary is the risk of financial institutions. The core issue is the pressure on banks' net interest margins and the operational stability of major financial institutions.

Based on this framework, we judge that current liquidity may have reached the boundary of easing.The core reasoning is that the 20-day average of the bond market leverage ratio has reached a historical high (above the 90th percentile). Historically, a bond market leverage ratio above the 90th percentile has been a crucial threshold triggering central bank policy adjustments and leading to a liquidity inflection point. We can briefly review four typical cases:

• The first instance was in June-July 2016, which was the most frenzied period of asset arbitrage during the previous easing cycle. The leverage ratio in the interbank bond market exceeded 90%. Subsequently, the Macroprudential Assessment (MPA) was launched at the end of the year, and policies began to gradually tighten.

• The second instance was in April-May 2020. At that time, due to the impact of the health crisis, the central bank increased its liquidity support. Subsequently, signs of arbitrage and diversion of funds from the real economy emerged. In April, the leverage ratio of the bond market reached a historical high. The central bank then suspended reverse repurchase operations from mid-April and clearly warned of the risk of idle funds in the monetary policy implementation report.

• The third time was in September-October 2022. At that time, due to policy requirements that all special bonds be issued by the end of June and fully utilized by the end of August, the concentrated release of fiscal deposits brought about a significant easing of liquidity. The leverage ratio of the bond market rose rapidly, reaching the historical threshold of the 90th percentile, and then a liquidity inflection point appeared in September.

• The fourth instance was in August 2023. In June, the 7-day reverse repo rate was lowered from 2% to 1.9%, marking the first reduction in short-term policy rates since August 2022. This coincided with the July Politburo meeting's emphasis on "strengthening counter-cyclical adjustments and policy reserves" and "adapting to the new situation of significant changes in the supply and demand relationship in my country's real estate market." Real estate risk events also began to emerge, and market sentiment drove the bond market leverage ratio to rise rapidly to above the 90th percentile. Subsequently, in August, the central bank reiterated the need to "prevent idle funds and arbitrage, and improve the efficiency of policy transmission," after which interbank rates began to gradually rise.

Historically, every time the bond market leverage ratio exceeded 90%, it brought about a turning point in liquidity. We are currently standing at this critical threshold again, which means the central bank will most likely shift from the most extreme easing position to at least a middle position within the monetary policy framework..

Subsequently, the key indicator for confirming the liquidity inflection point is the change in net financing of interbank certificates of deposit.Since the beginning of this year, the net monthly financing amount of interbank certificates of deposit has consistently been negative, which in itself fully demonstrates that the banking system is not short of funds. If we later see interbank certificates of deposit start to increase in volume and the net monthly financing amount returns to above zero, it will indicate that the liquidity of the banking system is no longer so loose. At that point, the liquidity inflection point will be finally confirmed.

In conclusion:FirstCurrently, liquidity is very loose, both in the interbank and non-bank sectors. This is the result of the combined effect of the central bank's liquidity injection and the shift of household deposits. Of course, it is also supported by factors such as the good export performance at the beginning of the year and the foreign exchange settlement surplus.second,We have observed a marginal adjustment in the central bank's stance, with open market operations shifting to net withdrawal and the monetary policy implementation report removing statements about interest rate and reserve requirement ratio cuts. Meanwhile, the economic recovery has also shown some resilience. Based on historical experience, the probability of further easing of liquidity is not high.third,Current liquidity may have reached the limit of easing, with the bond market leverage ratio breaking through the historical key threshold of 90%, and the risk of idle funds is rising.fourth,The final confirmation of a liquidity inflection point requires signals such as a surge in interbank certificates of deposit. We haven't reached that stage yet; we've only determined that we've entered a critical observation period for a liquidity inflection point. At the current juncture, the probability of further liquidity easing is low. The market needs to be more wary of increased volatility resulting from the marginal return of liquidity to equilibrium. However, considering the divergence between the two leverage ratio metrics, the process of liquidity returning to equilibrium will not be too drastic (r001 trading volume/bank pledged repo is high, but custody data measures it at a low level).

This article is sourced from: