Risk aversion gripped Chinese markets yesterday with the benchmark Shanghai Composite Index down by almost 7% (trading in Chinese stock markets was halted). Significant uncertainties on the Chinese economy remain as PMI numbers released over the past few days point to continued contraction in the manufacturing sector. With these worries dominating, further monetary easing by the People's Bank of China is likely in the coming months, keeping short-term CNY rates (7D repo and 3M Shibor) down. Meanwhile, 10Y CNgov yields are already below 3%. These levels are low from a longer-term perspective. There is scope for the CNgov curve to steepen as the front of the curve outperforms. 

Comparatively, implied CNH interest rates have been grinding higher. Most of this came on the back of the widening differential between the USD/CNY and the USD/CNH. While economic data point to an increasing probability of policy easing (including letting the CNY weaken), the differentials between onshore and offshore FX and interest rates are wide by historical standards. Spreads between onshore and offshore interest rates are unlikely to widen much further from current stretched levels. 

"We see scope for the implied 6M CNH Hibor to fall towards the 6M Shibor over the coming months. However, on average, we still think that CNH rates will trade at a premium over CNY rates for the coming year", notes DBS Group Research.