China rates: Liquidity to stay looser for longer

We add a long 5y CGB to our existing Dec-1s5s steepener position. On 19 October, PBoC Governor Pan announced at the Financial Street Forum 2026 that the PBoC would switch the primary tenor of open market operations from 7d to overnight in a discretionary manner, making the overnight OMO rate the main policy rate, largely in line with market expectations and our view. Governor Pan also noted that enterprises with strong financial capacity may negotiate with financial institutions to use either DR001 or LPR as the benchmark for floating-rate loans, and that the PBoC will work with NFRA and CSRC to establish liquidity support tools for large-scale redemptions by non-bank financial institutions, which we see as a means to prevent large bond selloffs such as in November 2022. We therefore believe bond yield volatility is likely to remain low and funding costs cheap and stable;