MNI CHINA LIQUIDITY INDEX: Liquidity Flows With Hopes For More

China's interbank market is awash with liquidity following the early February Lunar New Year holiday, boosted by injections of cash from the central bank and deposits from the wider economy, the latest MNI China liquidity survey shows.

The Liquidity Condition Index stood at 10.0 in February, down sharply from January’s pre-holiday 33.9, reflecting much looser conditions. It was the lowest reading since the early months of the pandemic two years ago.

The lower the index reading, the looser liquidity appears to survey participants.

“February is never a month to worry about liquidity as large amounts of cash return after Chinese New Year holiday,” a trader with a state-owned bank based in Shandong told MNI, with others noting a helping hand from the People’s Bank of China.

The PBOC conducted CNY300 billion MLFs in February, injecting CNY100 billion into the market after offsetting a CNY200 billion maturity. The Bank drained net CNY760 billion via its open market operation as of Feb 22, MNI calculated.

The Economy Condition Index rose for third month in February to 36.7, from last 28.6, with 16.7% traders encouraged by recent policies to boost growth. One Beijing-based trader pointed to the pick-up in bank lending across the month, a point underlined by a trader from Jiangsu who also noted a boost to state infrastructure spending

POLICY CONTINUITY

The PBOC Policy Bias Index fell modestly to 40.0 in February, down modestly on January’s 42.9, with 80.0% of the participants believing the current prudent policy. The balance of respondents see further easing ahead.

“More reserve/rate cuts are expected as the domestic economy is now at the counter-cyclical adjustment stage and the government is aiming to stabilize the economy,” a trader based in Shenzhen said.

The Guidance Clarity Index rose modestly to 58.3 in February, picking up from last month’s 55.4, with 83.3% of the traders seeing clear signaling or messages from the central bank’s moves.

RATES LOWER

The 7-Day Repo Rate Index edged down to 36.7 from 39.3 reading – with one third of traders predicting lower yields due to the ample liquidity. The 7-day weighted average interbank repo rate for depository institutions (DR007) closed at 1.1882% Tuesday.

The 10-year CGB Yield Index was 58.3 in February, down the previous 66.1 reading, with 56.7% seeing the yield trading in a fairly narrow range.

OUTLOOK

With China’s economy slowing in recent months and still facing downward pressure, MNI’s February special question asked: “How do you see the outlook for the economy?” Just over three-quarters saw an improvement, confident with the resilience of the economy and the determination of the government to maintain stable growth. Only 16.7% remain pessimistic, pointing to weakening demand and slowing production.

“Spring brings us hope and China’s economy will be like the spring – we have come out of the winter. We are ready to welcome the spring,” one trader told MNI.

The MNI survey collected the opinions of 30 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 Feb 7 – Feb 18.