MNI CHINA LIQUIDITY INDEX: Conditions Tighten; Guidance Clear

Liquidity condition across China's interbank market tightened modestly in August, as tax payments again weighed, along with heavy reverse repo maturities, the latest MNI Liquidity Conditions Index shows.

The Liquidity Condition Index rose to 84.4 in August from July's 68.8, the highest level since January, with 70% of respondents reporting tighter liquidity conditions.

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

Source: MNI China Liquidity Index

"Liquidity (in August) is a bit tighter," a senior trader based in Shanghai told MNI, adding he though the slightly tight conditions were what the People's Bank of China wanted to maintain.

The central bank conducted a CNY700 billion MLF in the middle of the month intended to offset the maturing CNY550 billion MLF, and injected net CNY 495 billion via reverse repos in August, MNI calculated.

ECONOMY STILL RECOVERING

The Economy Condition Index slipped slightly to 87.5 in August from the previous 15-month high 90.6. Three quarters of survey participants saw a strong resumption of the economy, with none of the other respondents noting any sort of downturn.

"The economy is not weak… we can tell from infrastructure investment and exports," a Nanjing based trader with state-owned bank told MNI, although she accepted there were still downside risks.

China's infrastructure investment continued to improve in the first seven months to show only a modest y/y decline. Property investment grew 3.4% y/y in the Jan-Jul period while retail sales, the most badly-hit sector during the pandemic, fell 9.9% y/y. China's exports grew 7.2% y/y in July, the best monthly rise so far this year.

PRUDENT POLICY, CLEAR GUIDANCE

The PBOC Policy Bias Index climbed to 68.8 from 65.6 in July, with 62.5% of the traders stating that policy was unchanged, with the balance seeing a marginal tightening.

To support the recovery "monetary policy tools shall be utilized more precisely to support the steady and healthy development of medium, small and micro enterprises," Gao Fei, vice head of PBOC's Financial Market Department said in a press conference held by the central bank earlier this month.

The Guidance Clarity Index edged up to 71.9 in August from 65.7 in July, with a growing number of traders saying they understood directions the PBOC would like to send to the market.

"Market expectation has been well guided by the central bank," a Nanjing fund manager said, noting this helped smooth market disagreement on policy direction.

LOWER YIELDS

The 7-Day Repo Rate Index eased to 65.6 from 75.0 last month – half of the participants predicted the rates will continue to rise in coming weeks while 18.8% predicting rates will come down.

The 7-day weighted average interbank repo rate for depository institutions (DR007) closed at 2.2132% Tuesday.

The 10-year CGB Yield Index slid for a third month, dropping to 43.8 from 56.3 recorded last month, with more traders (37.5% VS 25.0%) forecasting lower long-end yield.

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 Aug 10 - 21.