MNI CHINA LIQUIDITY INDEX:Conditions Ease, PBOC Cuts Expected

China’s interbank market liquidity continued to ease in December as The People’s Bank of China made the largest MLF injection on record in anticipation of significant government bond issuance and peak season demand, while traders expected more PBOC reserve and rate cuts in the near term to firm up 2024 growth, the latest MNI Liquidity Conditions Index showed.

Economic conditions improved marginally with 46.3% of participants seeing better conditions, but traders noted base effects had boosted headline data whilst underlying trends remained lacklustre, a matter which made near-term PBOC easing measures likely.

“The PBOC will use reserve and policy interest rate cuts next year given CPI of -0.5% and high real interest rates,” a Beijing trader said, but a Jiangsu based trader believed the PBOC’s recent CNY800 billion MLF injection had pushed back need for cuts in reserve requirements.

PBOC governor Pan Gongsheng reportedly told bankers recently at a forum in Hong Kong that China’s economy faced a “long and difficult road ahead” as the country made “structural adjustments”. The official manufacturing PMI remained in contraction territory at 49.4 for November.

While top leaders at the recent Central Economic Work Conference (CEWC) noted that the economy faced insufficient demand and overcapacity in some sectors, advisors have told MNI policy support would only be moderate as the focus remained on financial risks and high-quality development. (See MNI: China To Pursue Moderate Policy Support In 2024)

Private investment remains a concern, falling 0.5% y/y in 2023’s first 11 months, though many expect that trend to reverse next year as policy kicks in and the real-estate sector stabilises, advisors recently told MNI (See MNI: China's Renewed PPPs To Lift Investment, Curb Debt Risks)

LIQUIDITY EASES

The MNI China Liquidity Condition Index eased to 41.5 from November’s 56.4, with 36.6% of traders reporting looser conditions versus 20.5% previous. December’s reading indicates conditions are the most accommodating since August, when liquidity began tightening to its October peak of 62.8.

“Seasonal liquidity demand will likely surge towards year end but given the lacklustre economic recovery conditions won’t tighten,” a senior trader based in Anhui commented.

The PBOC conducted CNY1.45 trillion in MLF in December, injecting a record CNY800 billion after offsetting maturities of CNY650 billion. The PBOC also drained net CNY1.05 trillion via its open market operations as of Dec 19, MNI calculated.

Experts told MNI the central bank will continue with large liquidity injections as tax payments and cash demand pressure money markets before China’s Spring Festival in February, alongside continued government debt issuance. (See: MNI PBOC WATCH: LPR To Hold As CGB Liquidity Pressures Lenders)

RATES

Looking ahead, a Shanghai-based trader said short-end rates had potential to rise given increased demand coming towards Chinese New Year but 65.9% of participants believed rates would remain stable. For longer-term rates, 51.2% believed rates would remain flat, whilst 26.8% expected a fall.

The full report is available here:

MNI China Liquidity Index December 2023.pdf

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