MNI CHINA LIQUIDITY INDEX: Conditions Ease; Economy Improves

BEIJING (MNI) - Liquidity conditions eased across China's interbank market through July, but still face pressures due to increased bond issuance and mid-year tax payments, the latest MNI Liquidity Conditions Index shows.

The Liquidity Condition Index slid to 68.8 in July from June's 81.3, the first fall in five months. The index eased as 62.5% of respondents reported conditions unchanged, with the rest seeing a tightening in liquidity.

The higher the index reading, the tighter liquidity appears to survey participants.

Issuance of special bonds was the main driver of liquidity in July. A total one trillion special bonds will be issued by end of the month – including the CNY290 billion sold in June, according to Wind Information. Meanwhile, July is a traditional tax payment month, which also puts pressure. However, the People's Bank of China weren't actively seen tightening, helping the overall index ease.

The central bank conducted CNY400 billion MLF in mid-July intended to offset the maturing CNY200 billion MLF and CNY297.7 billion TMLF, MNI calculated.

ECONOMY ON TRACK

The Economy Condition Index rose for a third consecutive month in July to 90.6, following June's 78.1, with 81.3% of survey participants reporting the economy's continued recovery.

"China's GDP registered 3.2% y/y growth in Q2, or 11.5% q/q, which was quite encouraging and positive, especially on back of the global recession," a Shanghai based trader with state-owned bank told MNI.

STICKY POLICY

The PBOC Policy Bias Index rose to 65.6 in July from 59.4, with 68.8% of traders surveyed believing policy will remain prudent, with more creative measures being used to smooth policy measures, whilst further lowering costs to companies to help the economy.

The Guidance Clarity Index edged down to 65.7 in July from June's 71.9, with most traders understanding the PBOC's endeavor to conduct clear guidance and help stabilize the financial markets.

Prudent monetary policy will be both "flexible and appropriate" in the second half of the year, while various monetary policy tools will be used to maintain "reasonable and ample liquidity", the PBOC said in a press conference on H1 financial statistics earlier this month.

FALLING YIELDS

The 7-Day Repo Rate Index eased to 75.0 from 87.5, with a smaller percentage of the traders (56.3% Vs 75.0%) predicting the rate will continue to push higher in coming weeks, although some still see rates edging higher.

"Rates will rise as it's approaching month-end when money is short," a Jiangsu based trader told MNI.

The 7-day weighted average interbank repo rate for depository institutions (DR007) closed at 2.1732% Tuesday.

The 10-year CGB Yield Index slid to 56.3 this month from 68.8 recorded in June, with only a quarter of participants forecasting falling yields.

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 Jul 13 - Jul 24.