The scale of "accumulated" funds may exceed one trillion yuan, driving deposit certificate interest rates to reach historic lows. Where does the money come from?

Ask AI · How do expectations of RMB appreciation trigger a flood of interbank funds?

Cailian Press, April 8 (Editor: Li Xiang) As April begins, the interbank market’s ultra-loose liquidity—famously dubbed “water flooding Jinshan” within the industry—can be seen in the state of certificates of deposit. Cailian Press has noticed that funds are pushing interbank CD (certificate of deposit) rates toward historical extremes.

As of the weekend before last, the secondary yield of 1-year AAA-rated interbank CDs slid to 1.475%. At the same time, the primary issuance rate for 1-year CDs at state-owned banks also fell in step to 1.49%, with both setting the lowest levels on record since data began. After entering this week, although the central bank has maintained small-volume, net reverse repo injections, CD rates have remained stable at low levels; the 3-month AAA CD rate has even fallen below the 1.4% mark.

This week, the central bank conducted two consecutive days of 500 million yuan low-volume reverse repos, yet clearly stated that it “fully meets the primary dealer demand.” This shows that the central bank’s stance has not changed; more importantly, the market still does not lack funds.

Institutional participants believe that the main reasons for the market’s abundant liquidity may lie in expectations of RMB appreciation and stability on the bank liabilities side exceeding expectations, among other factors. The overall size of funds piled up in the interbank market may exceed the trillion-yuan level. However, from the perspective of CDs, concerns about differentiation on bank liabilities have also begun to show signs. In the CD supply-demand structure, some joint-stock banks’ long-dated CD tenors have shifted into slightly net issuance. It is also not ruled out that banks may raise CD prices around midweek this week.

Some traders also said that since late March, large amounts of funds have crowded into the short-term debt and CD markets, making trading very congested. The overnight rate is also unlikely to move further down. If rates continue to decline, it may only be through expectations of rate cuts, and market volatility may be amplified.

Chart: Performance of main-tenor CD rates

Breakdown of funding sources

This week, the central bank has carried out two consecutive days of 500 million yuan low-volume reverse repos, yet clearly stated that it “fully meets the primary dealer demand.” In the view of industry insiders, this indicates that the central bank’s attitude has not changed; rather, the market still has plenty of funds.

Where do the abundant funds in the current market come from? Judging from fixed-income research reports compiled from some brokerages, the banking system’s ample funds may mainly come from expectations of RMB appreciation and stability on the bank liabilities side exceeding expectations, with the scale possibly reaching the trillion-yuan level.

In a related research report, Meng Wanlin, Chief of Northeast Fixed Income, said that since the beginning of this year, the RMB has faced upward pressure. When the central bank buys foreign exchange and sells RMB, it leads to an increase in the central bank’s foreign exchange reserves and increases liquidity injection. One of the major signals is that the loan-to-deposit spread of large banks has risen significantly. “When the central bank’s foreign exchange reserves rise, it generally comes with the injection of base money. This is reflected in banks’ balance sheets—mainly as an increase in large banks’ loan-to-deposit spreads—thereby improving banks’ ability and willingness to provide financing.”

In addition, stability on the bank liabilities side has exceeded expectations, and credit demand is relatively weak, which also shows that liabilities for the banking system remain stable. Meng Wanlin said that, based on the trend of bill rates in March, the scale of medium- and long-term credit financing in March is expected to be 1.8 trillion yuan, slightly lower than the same period in 2025. April is also a traditional off-season for credit demand, which may push large banks’ loan-to-deposit spreads higher and thereby boost banks’ willingness to provide funds, leading to a decline in funding rates.

Meanwhile, in March, the central bank also injected liquidity into the market through SLF, structural monetary policy instruments, open-market purchases and sales of government bonds, treasury cash management, and other measures. “OMO + MLF + outright reverse repo balances of the central bank are still at a high level, which basically aligns with the central bank’s stance on monetary policy. This is also the most fundamental source of liquidity,” Meng Wanlin said. In a related research report, Li Yishuang, Chief of Huafu Fixed Income, wrote that from the perspective of funding gaps, the seasonally unadjusted funding gap index stayed low outside quarter-crossing days. Last Friday it dropped to -12076, a historical low, and also below the pre-season-adjusted index of -9547. March’s cross-quarter funding occurred at the latest timing among recent years. Although banks accelerated cross-quarter funding in the interbank market toward month-end, non-bank institutions slowed compared with previous years. On the quarter-end day, the share of cross-quarter funds across all institutions reached 54%, at the highest level in history.

Some analysts also said that, based on the central bank’s balance sheet, at the end of February, the balance of “claims on other deposit-taking corporations” reached 22.47 trillion yuan, surging by nearly 2 trillion yuan from 20.50 trillion yuan at the end of 2025. The widening of the M2–M1 scissors gap in February indicates that there is insufficient activation of funds; funds are “accumulating” in the interbank market, further reinforcing loose funding conditions.

“Once base money transmits to broad money, the multiplier effect may mean that the overall scale of easing is not low,” an institutional source said.

Future games over CDs under low interest rates

Wind data shows that in the first week of April, secondary yields of AAA-rated CDs across all tenors declined across the board. Among them, 1M and 6M products fell by 4bp from the previous week, the 9M product fell by 6bp, and the 3M and 1Y products fell by 5bp. The 1-year benchmark product ultimately ended at 1.48%. Primary-market issuance also adjusted down in parallel: the weighted average issuance rate of 1-year CDs at joint-stock banks fell by more than 6bp compared with mid-to-late March.

Cailian Press noted that after CD rates touched historical lows, they began showing another downward trend. Fundamentally, this is the result of the joint effect of continuous contraction on the supply side and a structural shock on the demand side under conditions of abundant liquidity.

From the supply side, the pattern of banks being “strong on deposits and weak on loans” has not changed fundamentally.

Yan Ziqi, Chief of Guohai Fixed Income, said that behind the contraction on the supply side are weaker loan demand from enterprises and residents, alongside deposit outflows that are better than expected. This means the banking system is not short of liabilities, and banks’ willingness to keep relying on CD financing remains subdued.

However, banks are starting to show early signs of differentiation in issuance structure. According to statistics from Huachuang Fixed Income’s team, based on performance in the first week of April, the share of issuance by state-owned banks jumped from 30% to 47%, while the share by joint-stock banks fell from 34% to 16%. Reflected in net financing, state-owned banks, joint-stock banks, city commercial banks, and rural commercial banks issued 155.2 billion yuan, 53.2 billion yuan, 102.2 billion yuan, and 14.2 billion yuan in the week respectively; their net financing figures were 136.7 billion yuan, -20.6 billion yuan, 45.3 billion yuan, and 11.1 billion yuan respectively.

“Negative net financing for joint-stock banks indicates that at this stage they have switched to becoming providers of funds, especially because the issuance pace of long-tenor CDs is faster, which is related to stability on the liabilities side during the cross-quarter period. For now, it cannot be ruled out that joint-stock banks may increase short-term issuance of long CDs,” said Tang Yuanmao, Chief of Guotai Junan? (Guotai Haitong) Fixed Income.

However, Tang Yuanmao said that based on current CD pricing, there is a possibility that in the second quarter, joint-stock bank CDs issued in the primary market below 1.5% could see a noticeable price increase in a single week (the upper bound could be around 1.55%). A similar situation occurred in October 2025, when short-term primary CD rates rose sharply; this would create a clear disturbance to the pricing of both secondary CDs and short-term bonds.

In addition, regarding the excess reserve ratio, Li Yishuang said that if the central bank maintains low-volume operations next week, the central bank’s excess reserve ratio may move from the current 1.4% level back into the 1%–1.1% range, and DR001 is very likely to gradually rise as well.

After CD rates set historical lows, the market’s view on the next trend is fairly consistent: “the central tendency will be hard to trend upward, and volatility will likely be amplified.” Differences mainly focus on the timing and magnitude of any rate rebound.

A bank trader said that the current CD levels below 1.5% have already priced in expectations of abundant liquidity, leaving limited room for further decline. However, banks’ own-account rigid allocation demand will not disappear in the near term. Before real on-the-ground credit demand recovers substantially, it will be difficult for the rate center to rebound in a sustained trend; every pullback may present an opportunity for allocation.

Some market analysts also pointed out that around 1.45% could be a relative lower bound for CD rates. Volatility is expected to increase, and any further decline would rely only on expectations of rate cuts or strong rate-cut expectations. The April rebound in CD prices will require closer attention to key windows such as mid-to-late month tax periods, month-end, and the MLF operation window. The pace of recovery in real credit demand, the evolution of input-driven inflation, and the marginal changes in the central bank’s monetary policy will become the core variables determining the trajectory of CD market rates.

(Cailian Press, Li Xiang)