MNI CHINA LIQUIDITY INDEX: Conditions Tighten Into Quarter End

--MNI Jun China Liquidity Conditions Index 81.3 Vs 30.0 May

     BEIJING (MNI) - Liquidity tightened across China's interbank markets in

June, as cash demand from special bond issuance, tax payments and quarter-end

regulatory needs alongside maturing central bank injections drained funds from

the system, the latest MNI Liquidity Conditions Index shows.

     The Liquidity Condition Index rose for a fourth straight month, surging to

81.3 in June from 30.0 in May, hitting the highest level in five months. with

almost two-thirds of respondents seeing tighter conditions than in recent

months.

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

participants.

     "(Conditions) are tightening obviously as it's coming to the end of

quarter/half year," a trader with state-owned bank based in Shanghai told MNI.

     --ECONOMY RECOVERING

     The Economy Condition Index rose for a second consecutive month to 78.1 in

June, the highest level seen this year, indicating the recovery is picking up

pace, with 68.8% of survey participants seeing the situation improving.

     "Economic indicators like industrial production and investment are edging

up, though retail sales were a bit lower than expectations," a fund manager

based in Nanjing said,

     --TIGHTER POLICY

     The PBOC Policy Bias Index rose to 59.4 in June from previous 33.3, with

68.8% of the traders believing the recent 'two sessions' had stabilized monetary

policy expectations -- "prudent" but more flexible and appropriate to support

the real economy.

     The Guidance Clarity Index climbed up to 71.9 in June, compared with the

70.0 in May, as more traders see the PBOC conducting better communication with

the financial markets.

     "The central bank informed on MLF operations in the coming week for the

first time on June 8, obviously to avoid any misunderstanding of PBOC's action

and it stabilized the market," one Shanghai fund manager said, noting a failure

to do so could have caused market initial disruption.

     --HIGHER YIELDS

     The 7-Day Repo Rate Index soared to 87.5 from previous 53.3, with three

quarters of the traders predicting the rate will continue to rise in coming

weeks.

     "Rates will continue to rise as it's approaching both month- and

quarter-end when money is short, banks and institutions will also need enough

money to pass assessment levels" the Shanghai manager told MNI.

     The 7-day weighted average interbank repo rate for depository institutions

(DR007) closed at 2.1070% Tuesday.

     The 10-year CGB Yield Index rose to 68.8 -- the first on month rise in six

months -- with half of participants forecasting higher yields.

     However, there were dissenting voices, with some seeing growing risks.

     "Longer-dated bonds face uncertainties, but from my point of view, the

premium will be made up gradually due to the increasing risks," a Fujian based

trader told MNI.

     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 Jun 8 - Jun 19.

--MNI Beijing Bureau; tel: +86 (10) 8532-5998; email: flora.guo@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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