China's fixed income: Foreign exchange increases boost M2, weakening loan demand, benefiting bond allocation demand.

The research report of CITIC Fixed Income points out that since the fourth quarter of last year, the support of government bond financing for social financing has weakened. Against the background of continued weakness in private sector financing demand, the overall growth of social financing has been relatively weak, with the year-on-year growth rate of social financing balance decreasing from 8.3% in December last year to 8.2% in January. At the same time, due to the weak US dollar and the continuous slight strength of the Renminbi exchange rate, the willingness of enterprises to settle foreign exchange has increased. In addition, non-bank deposits have continued to strengthen, leading to a rapid growth in deposits and broad money, with the year-on-year growth rate of M2 rising from 8.0% in November last year to 9.0% in January. From the perspective of interest rate determination, the difference between the year-on-year growth rate of social financing balance and the year-on-year growth rate of M2 largely determines the interest rate trend. Considering the possible continued drag on overall financing due to insufficient short-term private sector financing demand, while the increase in enterprise foreign exchange settlement is expected to continue to support deposit growth, the difference between the year-on-year growth rate of social financing balance and M2 may continue to decline, which may mean that bond yields will further decrease. Since January, the insufficient bank credit and the increase in bond allocation have led to a gradual decline in medium and long-term interest rates. The subsequent release of more bank allocation demand may occur, coupled with the possibility of further easing of monetary policy by the central bank, suggesting that further decline in bond yields is still worth anticipating. Previously, the market was concerned about first-quarter inflation exceeding expectations. However, industrial commodity prices have fallen recently, and the domestic economy continues to maintain a low inflation situation. Overall, we continue to be optimistic about the domestic bond market and recommend investors to actively pay attention to trading opportunities that may arise from post-Spring Festival inflation expectations.