MNI CHINA LIQUIDITY INDEX: China Index Hits Highest Since 2022

China’s January interbank liquidity index reached its highest since December 2022 following the PBOC’s reserve requirement ratio cut and medium-term lending facility injections, with traders’ expectations for further easing at the highest since March 2020 given weak data, the MNI China Liquidity Index showed.

The MNI China Liquidity Condition Index fell to 34.1 this month, a 14-month-low after the PBOC injected CNY216 billion using its MLF facility and cut the RRR rate by 50-basis-points following a drop in q/q growth in Q4.

Further PBOC moves are anticipated, with 36.6% of traders expecting more easing, the highest since March 2020 . Policy advisors and economists have warned any further relaxation given weak credit demand could fuel financial arbitrage, after new yuan loans grew less than expected in November. (See MNI: PBOC Seen Easing MLF, Repo Rates Later In 2024)

“Authorities will drain excess liquidity using the large volumes of upcoming maturing reverse repos to keep conditions reasonable,” a local trader in Beijing anticipated.

ECONOMY MIXED

Driving expectations for more easing were December’s economic data, which, though 2023 GDP growth hit 5.2%, showed consumption growth slowed to 7.4% y/y, while property investment dropped 9.6% y/y.

The MNI China Economy Condition Index read 59.8 in January, down from 64.6 in December, with 36.6% of the traders believing conditions improved, falling from 46.3% previously.

“Low inflation has raised real interest rates, causing demand to fall. Policymakers must act,” a Jiangsu trader said, while another trader noted positive base effects from 2022 were beginning to fade and exports remained lacklustre.

Given economic uncertainty, advisors expect authorities to issue additional government bonds and unveil private sector reforms at the anticipated Third Plenum. (See MNI INTERVIEW: Third Plenum To Detail Reform)

The central bank could cut policy rates as soon as late Q1 or early Q2 should the economy continue to struggle, whilst also stepping up targeted support. (See MNI: Policy Rate Cut Still Live and MN: PBOC To Boost Targeted Facilities)

RATES

Ample liquidity and expected further easing should cause the 7-Day Repo Rate to fall, according to 34.1% of traders, up from 9.8% previously. Whilst for the 10-year CGB Yield, 34.1% of traders saw a fall, up from 26.8% previous, with a Shanghai trader expecting a decline in yield along with a fall in bank deposit rates.

Click below for the full press release:

MNI China Liquidity Index January 2024.pdf

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