CHINA LIQUIDITY INDEX: Economic Conditions Lowest Since August

The MNI China Economy Condition Index hit its lowest level since August last year in June, with 30.2% of traders noting a deterioration in the economy versus 16.7% last month, the MNI China Liquidity Index has shown.

The MNI China Economy Condition Index read 51.2 in June, down from 65.5 previously.

“The slowdown of industrial production pointed to a slower domestic recovery,” a senior trader based in Beijing said, whilst a Guangdong trader noted retail data was buoyed by the national holiday but was weak overall.

Interbank conditions also tightened during the month, as banks withdrew funds ahead of Q2 macro-prudential assessments, and the PBOC drained liquidity as concerns increased over idle funds and low bond yields. The MNI China Liquidity Condition Index reached 62.8, up from May’s 23.8, the highest since October 2023. A higher reading indicates less liquidity.

“Liquidity in June started loose but changed when the PBOC drained money back via the MLF,” a Jiangsu based trader told MNI.

“Tax payments, together with the quarterly MPA aggravated the tightness further,” a trader in Shanxi said.

The PBOC conducted CNY182 billion in 1-year MLF on June 17, draining CNY55 billion after offsetting the CNY237 billion maturity. The central bank has drained net CNY295 billion via its open market operation as of June 24, MNI calculated.

The PBOC drainage comes as officials increasingly worry high levels of liquidity are stimulating bond-market leverage rather than the real economy. (See MNI: PBOC Eyes CGB Selling To Curb Bull Bond Market)

FURTHER EASING

The MNI survey showed that 34.9% of local traders expected further monetary easing in Q3, with 20.9% saying it was unlikely, and the remainder unsure.

The PBOC kept its one-year MLF stable at 2.5% on June 15 for the 10th consecutive month followed by banks holding the 1-YR LPR at 3.45% and the 5-YR at 3.95%.

“A cut to reserve requirement ratios is needed to ease pressure, considering current bank excess reserve ratio is generally low, and planned government bond issuance will impact funding,” a senior trader told MNI, predicting a likely Q3 RRR move.

But a range of factors, such as the weak yuan and the PBOC’s desire to curb interest rate arbitrage, will make an MLF reduction less likely, alongside the PBOC’s unexpected diminished emphasis on the rate in recent remarks by PBOC Governor Pan Gongsheng. (See: MNI PBOC WATCH: LPR Reduction Eyed, MLF Downgrade Next)

RATES

The MNI China 7-Day Repo Rate Index increased to 66.3 in June, up from previous 54.8, with 48.8% of participants expecting an upward curve due to upcoming assessments in the financial sector.

The MNI China 10-year CGB Yield Index read 30.2, down from 31.0 previous, with 46.5% traders predicting the yield dipping further, and 46.5% anticipating no change.

“The relatively flat May economic data may fuel bullish sentiment in the bond market, which may drag the yield down more,” the Tianjin trader said.

ECONOMY DOWN

The Caixin Manufacturing PMI hit a 23-month record of 51.7 in May, while the National Bureau of Statistics PMI dipped to 49.5, a multi-year high divergence driven by downstream strength among east coast export-oriented SMEs, Caixin’s senior economist recently told MNI. (See: MNI: China Exports Strong In H2, Despite Diverging PMIs)

Industrial production rose 5.6% y/y in May, below the 6.0% consensus and down from 6.7% in April. Retail sales increased 3.7% y/y, up 1.4 pp but short of the 4.5% market expectation.

The full report can be read here:

MNI China Liquidity Index June 2024.pdf