MNI CHINA LIQUIDITY INDEX: Liquidity Tighter; Economy Recovers

China’s economy is recovering from the recent Covid-triggered downturn, with many survey indicators picking up and liquidity conditions tightened into the half-year end, the latest MNI Liquidity Conditions Index shows.

The Liquidity Condition Index, rose to 57.8 in June from 12.5 previously, the highest reading in three months. One-in-five traders saw conditions “tighter than last month” as the year’s 6-month mark approached.

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

Although temporary factors were tightening conditions this month, overall liquidity will recover into July “on back of coordinated fiscal policy and monetary policy,” a trader with a state-owned bank in Shandong told MNI.

“Liquidity in short term will still be reasonably ample due the lasting impact of the local epidemics, and the weak demand for physical financing,” a senior trader based in Jiangsu calculated,

“Funds may have to bear some pressure (on rates) before end-quarter, as the demand will surge, together with fiscal expenditure,” a trader with state-owned bank based in Beijing warned.

The People’s Bank of China conducted CNY200 billion MLF in June, offsetting the equivalent maturity. PBOC injected net CNY50 billion via its open market operation as of June 28, MNI calculated.

ECONOMY REBOUND

The Economy Condition Index, bounced back strongly to 79.7 from 18.8 in May, the best reading in a year. The jump was driven by the recovering economic indicators as well improved market confidence.

“A number of major economic indicators stabilized and rebounded in May, along with the control of the pandemic and the gradual resumption of business and production,” one Shanghai trader back at his desk after lockdowns told MNI.

“Production recovered quickly in May -- close to pre-covid level, showing the great resilience of China economy, although we still see difficulties in the services sector resumption,” another trader in Beijing noted.

POLICY ON HOLD

The PBOC Policy Bias Index edged down to 40.6 in June, from 42.2 in May, with 81.3% of the participants seeing current policy will be on hold.

“Monetary policy will maintain its current loose orientation, but a looser policy will be of rare possibility due the resistance of overseas interest rate hike cycle and increasing pressure of domestic inflation,” a trader with a leading commercial bank in Zhejiang commented.

The Guidance Clarity Index stood at 56.3 in June, slipping modestly from 59.4. The high level of the reading underlines the market’s satisfaction in understanding the central bank’s action.

RISING RATES

The 7-Day Repo Rate Index climbed up to 60.9 from 40.6 reading, with rates expected to rise by 40.6% participants over the quarter-end.

The 7-day weighted average interbank repo rate for depository institutions (DR007) closed at 1.9698% Tuesday.

The 10-year CGB Yield Index stood at 68.8 in June, up from the previous 65.6 reading, with 46.9% predicting higher yields.

“I think current 10Y treasure bond yield is at its bottom, hard to go lower. Along with the recovery of the economy starting from the second quarter, the yield will climb as well,” the Shanghai trader said.

The MNI survey collected the opinions of 32 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 June 13 – Jun 24.