MNI CHINA LIQUIDITY INDEX: Conditions Loosen; Policy Steady

China's interbank market saw relatively loose liquidity conditions through December as the People's Bank of China kept the funds flowing to ensure no slowdown in available credit for companies and ample cash going into the calendar year end, the latest MNI Liquidity Conditions Index shows.

The Liquidity Condition Index fell to 15.7 in December after November's 43.8, with 68.8% respondents reporting looser conditions, matching levels seen earlier this year when the central bank injected liquidity soon after the outbreak of Covid-19.

The lower the index reading, the looser liquidity appears to survey participants.

"Conditions are turning much looser after the PBOC injections … overnight rates have fallen quickly," one Beijing trader with state-owned bank said, adding that the central bank moves were in part aimed at helping firms pass the Macro Prudential Assessments.

"The injection is not the shift in policy but to eliminate any market panic caused by SOE defaults," an Anhui based senior trader told MNI.

The central bank conducted CNY950 billion MLF in December to offset a maturing CNY900 billion and to release some medium-and-long term funds It drained a net CNY390 billion via open market operations as of December 21, MNI calculated.

ECONOMY RECOVERS

The Economy Condition Index climbed up to 90.6 from 87.5, with 81.3% participants encouraged by the recovery. The reading has been above 90 for four times in the last 6 months.

The PBOC Policy Bias Index slid to 50.0 in December, the lowest in seven months, with 75% of participants believing the PBOC is sticking to its prudent policy without any bias change, with one Shanghai fund manager seeing the change as seeking flexibility to "use monetary tools to keep a balance in supply and demand ."

The Guidance Clarity Index stood at 68.8 in December, up from 56.3 in November, as 25% more traders said they would follow the messages conveyed by PBOC moves.

"The central bank is adjusting the strength and the rhythm of policy tools including MLF and OMOs to maintain reasonable and ample liquidity, and to guide the markets rates run stably around the policy rates," the Shanghai based trader said.

YIELDS MIXED

The 7-Day Repo Rate Index slid to 71.9 from last 53.1, with half of the participants predicted the rates will rise in coming two weeks out of the rising demands in cash towards the end of year. The 7-day weighted average interbank repo rate for depository institutions (DR007) closed at 1.8860% Tuesday.

The 10-year CGB Yield Index, however, fell sharply to 37.5 in December, compared to 81.3 last month, the lowest since May.

"The yield has been climbing for months and now is standing above 3.2%, I would say there is likely a callback in future, " the Shanghai fund manager predicted.

The MNI survey collected the opinions of 16 traders with financial institutions operating in China's interbank market, the country's main platform for trading fixed-income and currency instruments, and the main funding source for financial institutions. Interviews were conducted Dec 7 – Dec 18.