MNI CHINA LIQUIDITY INDEX: PBOC Prompts 22-Month Low

China’s interbank market liquidity eased in February, with MNI’s China Liquidity Index hitting a 22-month low, as the central bank moved to support spring festival demand and a patchy economic recovery, despite risks that looser funding could fuel financial arbitrage.

The MNI China Liquidity Condition Index read 26.8 in February, down from 34.1 in January, with traders pointing to a PBOC reserves requirement cut and injections of CNY1.3 trillion via reverse repos before the holiday. Higher index readings indicate tighter conditions.

“The easing has extended even after the holiday,” a Tianjin-based trader told MNI.

Previous easing, such as the central bank's CNY3 billion MLF injection last July when the China liquidity index slid 60.5 to 35.9, has tended to fuel financial arbitrage rather than stimulate the real economy. (See MNI: PBOC Seen Easing MLF, Repo Rates Later In 2024)

ECONOMY STABLE

Meanwhile the outlook for economic conditions remained stable, with traders encouraged by stronger holiday retail activity but still concerned by patchy recovery. Tourist spending during February’s lunar holiday reached CNY633 billion, up 47% y/y and 8% on 2019 levels, official data showed.

The MNI China Economy Condition Index read 56.1 in February, down from January’s 59.8, with 31.7% of traders noting improvements, down from 36.6% in January.

“As usual we expect the spring festival retail bounce to fade, construction activity post-holiday looks light and demand for industrial products is slow,” a Jiangsu-based trader commented.

Given persistent weakness in the property sector, the PBOC moved to cut the Loan Prime Rate’s five-year plus tenor by 25 basis points in February, which could signal further easing ahead. (See MNI PBOC WATCH: Hefty 5Y LPR Cut Aimed At Mortgage Support)

Local governments have set lofty GDP targets in the build-up to the National People’s Congress in March, which could lead the central government to issue more bonds to support growth, policy advisors recently told MNI. (See MNI: High Local Targets Hint At Further China Gov. Leverage)

RATES DOWN

The MNI China 7-Day Repo Rate Index climbed to 48.8 in February, with 29.3% of traders seeing an increased rate versus 31.7% expecting a decline.

The MNI China 10-year CGB Yield Index read 32.9, with 41.5% of traders predicting a declining rate.

“The 10-yr CGB yield dropped to around 2.4% and could decline further considering fundamentals are still weak and monetary policy could ease more,” a trader in Fujian said.

Authorities should limit IPOs to rebalance supply and demand, and encourage more long-term funds to revive confidence in capital markets, policy advisors and market analysts have told MNI. (See MNI: China Should Limit IPOs, Boost Growth To Lift Stock Market)