China rate markets signal cooling bets on deflation, PBOC easing

Published Thu, Mar 19, 2026 · 10:14 AM

CHINA’S interest rate markets are indicating reduced expectations for further easing of funding conditions and monetary policy, reflecting renewed economic optimism and lingering concerns about elevated oil prices.

The yield on 30-year government bonds reached an 18-month high this week, after rising for three consecutive weeks. Onshore interest-rate swaps, which are tied to a key gauge of borrowing costs among banks, also rebounded from an 11-month low earlier this month.

The repricing has come as the world’s second-largest economy showed a surprise expansion in early 2026, as well as a consumer price uptick and moderating factory deflation. The prospect of a prolonged war in Iran, which has already started complicating global central banks’ decisions, is also sowing doubts about Beijing’s capacity for more aggressive policy loosening.

“With the PBOC (People’s Bank of China) signalling no near-term rate cuts and already withdrawing medium- to long-term liquidity,” market participants are pricing in a higher probability of a flat-or-slightly-higher policy stance for rates, said Wei Li, head of multi-asset investments at BNP Paribas Securities (China). “The central bank is likely to rely on targeted, short-duration operations rather than broad policy easing.”

After a recent rise to about 1.5 per cent, the one-year interest rate swap (IRS) is now on par with the seven-day repurchase agreement fixing rate that sets the floating-rate leg of the IRS. The swap rate was lower than the fixing through most of January and February, signalling expectations of falling borrowing costs.

Investors and businesses use the swaps to hedge their interest rate exposure by exchanging a fixed-rate income stream for floating rates.

“Judging from the swap market, there is no sign for market pricing for additional easing,” said Wee Khoon Chong, a strategist at BNY. Beijing’s primary policy focus is likely on encouraging consumption and promoting credit growth, he said.

The absence of an announcement on monetary easing by China’s central bank governor at a key briefing during the country’s annual legislative session earlier this month also contributed to the recent correction to rates, according to Clair Gao, a strategist at Nomura International. The market likely has been “gradually pricing out near-term rate-cut expectations since last week”, Gao said.

A number of global banks have recently revised forecasts to show a quicker-than-expected end to producer price deflation, with Goldman Sachs, Mizuho Securities and Citigroup among those that adjusted estimates in March to predict fewer or later rate cuts this year.

The PBOC’s money market operations in late March, when funding conditions tend to tighten on banks’ need to keep more cash for regulatory checks, may provide fresh clues about authorities’ policy stance.

The central bank has tightened liquidity so far this month, withdrawing 300 billion yuan (S$56 billion) via three- and six-month outright reverse repos on a net basis, ending nine straight months of net injection.

Despite diminishing expectations for an imminent rate cut, the PBOC is unlikely to create or tolerate a cash crunch in the financial system.

While funding could get tighter in the next two weeks due to factors including government bond issuance, the PBOC will likely ensure sufficient and stable liquidity, Nomura’s Gao said. At the same time, it will avoid flooding the market with cash, she added. BLOOMBERG