Lower finacing costs from 2014 rate cuts not low enough

A drop in financing costs is limited.

Chinese industrial profits posted the first YoY growth this year, at 2.6% in April, versus a 2.7% decline from January to March.

According to a research note from CCB International, lower financing costs resulting from rate cuts since November 2014 contributed to the rise in profits.

Interest expense took up 22.4% of total profits in April, versus a share of 24.9% in January and February, consistent with the pickup in April’s industrial production growth we saw earlier.

According to Reuters, the PBoC sold forward repos of more than RMB100b to select financial institutions during the week in order to drain spare short-term liquidity.

Here's more from CCB International:

We do not view this as a sign of any tightening by the PBoC. In fact, China’s interbank repo rates stayed at their lowest level since 2010. Notably, the overnight repo rate slid below 1% for the first time since 2009, hinting ample short-term liquidity in the bank system.

However, a drop in financing costs at the long-end is limited, as suggested by the yield on 1Y mid-term notes and the expected return on wealth management products.

We continue to forecast another 25bp interest rate cut by the end of June. We believe lower interest rates at the long-end, along with more targeted liquidity injections, will be implemented in time to counter the current economic slowdown.

Despite the slump of 6.5% on 28 May, the Shanghai Composite Index fell only 1.0% during the week ended 27 May. The outstanding amount of margin purchases in Shanghai and Shenzhen Stock Exchanges combined stands at RMB2.07t. We expect a further increase in outstanding margin purchases to take some time, but not without some ebb and flow first.