MNI CHINA LIQUIDITY INDEX: Ample Liquidity Into Quarter-End

Liquidity conditions across China's interbank market were seen as ample into the June month end, with the People's Bank of China ensuring enough cash in the system for financial institutions to pass the quarter-end Macro Prudential Assessment (MPA), the latest MNI Liquidity Conditions survey shows.

The headline Liquidity Condition Index edged down to 35.4 in June from last 41.7, with one third of the traders surveyed reporting improved condition with better liquidity. The higher the index reading, the tighter liquidity appears to survey participants.

"Liquidity tightened in the first two weeks when the overnight repo rate surged as it was time for banks to meet the reserve requirement," a trader with State-owned bank based in Shanghai told MNI. Rates fell quickly later in month after the central bank boosted injections," another trader in Shandong said, referencing the PBOC's increased open market operations from June 17 to "maintain stable liquidity towards the end of half-year".

The central bank conducted CNY200 billion MLF through the month to cover maturing operations with the rate unchanged at 2.95%, before injecting CNY39 billion via open market operation as the end of June 29, MNI calculated.

SLOWING RECOVERY

The Economy Condition Index slid to 47.9 in June from the previous 58.3, as concerns over the pace of the economic recovery grow. One trader based in Jiangsu noted that recent data was disappointing and caution was needed over 'blind optimism'.

The latest PMI stood at 51.0 after climbing to 51.1, with production index up to 52.7, although new orders fell to 51.3, reflecting imbalances between supply and demand. MNI's special survey question asked respondents how they saw the pace of the recovery in H2. More than half, 58.3%, said the best of the recovery was behind and the bounce would slow ahead. Just under a third was a continuation of the strong recovery.

POLICY CLARITY

The PBOC Policy Bias Index stood at 52.1 in June, up from the 47.9 marked in May, with over 95% of the participants trusting policy would remain stable. "The concerns of tightening at the beginning of the year has gradually receded," a Beijing based trader with the top state-owned bank commented, noting little chance of a "sharp turn of the policy to cause possible volatility."

The Guidance Clarity Index rose to 60.4 in June from the 54.2 reading in May, with all respondents welcoming the transparent guidance from the central bank, with the PBOC saying on June 21 that markets need not worry "about the unnecessary liquidity concerns, and it is not advisable to predict any 'tightness' or 'volatility".

DIVERGING RATES

The 7-Day Repo Rate Index edged down to 43.8 from last 56.3 with 20.8% of the traders seeing a higher rate due to a shortage of liquidity in short term, while 33.3% see the rate falling after the end-month MPA. The 7-day weighted average interbank repo rate for depository institutions (DR007) closed at 2.5219% Tuesday.

The 10-year CGB Yield Index stood at 45.8 in June after the 31.3 reading in the previous month, with two-thirds of traders seeing a tight trading range in the next three months and another 20% predicting a lower yield.

The MNI survey collected the opinions of 24 traders within 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 14 – Jun 25.