MNI CHINA LIQUIDITY INDEX: June Liquidity Tighter

China’s interbank liquidity tightened for the fourth straight month in June, as the People’s Bank of China’s end-H1 macro-prudential assessment (MPA) saw banks hoard funds to bolster balance sheets. Economic sentiment continued to decline, with traders concerned over sluggish data from real estate, exports and consumption, the latest MNI Liquidity Conditions Index showed.

The MNI Liquidity Condition Index reached 60.5 in June, up from 55.3 last month, as 39.5% of local traders reported conditions tightened, with 42.1% reporting them unchanged from May.

The higher the index reading, the tighter liquidity.

Banks lowered LPR quotations by 10bps in June, following the PBOC’s earlier moves to guide interest rates on deposits lower, cut the 7-day reverse repo rate by 10bp to 1.9% and reduce its medium-term lending facility (MLF) by 10bp. (See MNI PBOC WATCH: MLF Rate Cut In Sight After Repo Move - Bonds & Currency News | Market News)

The PBOC also conducted CNY237 billion in MLF in June, injecting CNY37 billion into the market after offsetting the maturity of CNY200 billion MLF. The PBOC injected a net CNY597 billion via open market operations as of June 26, MNI calculated.

“The recent tightening is mainly because banks are facing the first half MPA, and also because of expectations authorities will increase the intensity of special bond issuance to stabilise the economy,” a trader with a big commercial bank based in Beijing told MNI.

A senior economic policy advisor to the National Development and Reform Commission told MNI recently that the government is expected to unveil more monetary and fiscal support in H2 to ensure the 5% economic growth target is achieved. (See MNI INTERVIEW: China Stimulus To Boost Economy In H2 - Bonds & Currency News | Market News)

The MNI PBOC Policy Bias Index showed 76.3% of the traders believed the policy stance would be maintained going forwards.

ECONOMIC OUTLOOK

The MNI China Economy Condition Index reached 48.7 in June, down from 53.9 in May, marking the fourth month of consecutive decline, with 34.2% of participants seeing a deterioration in conditions.

“Decreasing homebuyer demand and falling house prices have added risks and pessimism to the real estate market,” a trader said, expressing concern over possible financial risks from property companies.

Industry officials and experts recently told MNI calls on policy makers to lift property market restrictions were growing stronger, following recent developer delistings. (See MNI: China Seen Easing Restrictions As Developers Delist - Bonds & Currency News | Market News)

“The recovery has been slowing down in the past two months, driven by weakening real-estate data, a fall in exports and sluggish consumption growth,” a trader with a state-owned bank based in Zhejiang said, pointing out that the PBOC's move to cut its repo rate came in response to the fragile recovery.

Industrial production grew 3.5% y/y in May, down from April’s 5.6%. Retail sales grew 12.7% y/y, down from 18.4%. Fixed-asset investment in the Jan-May period was up 4.0% y/y, with property sector investment falling 7.2% y/y.

Analysts' have expressed continued concerns over weak price data, with producer prices down 4.6% y/y in May, and CPI gaining only 0.2% y/y. PBOC Governor Yi issued a statement saying that he expects price rises to accelerate in H2. (See MNI: Weak Price Data Adds To Rate Pressure On PBOC- Economists - Bonds & Currency News | Market News)

RATES DOWN

The MNI China 7-Day Repo Rate Index reached 50.0 in June, down from 57.9 in May, with 36.8% of participants seeing the rate curve dropping.

“Short term rates are dropping after the central bank injected large amounts to release tightness,” a Shanghai trader said.

The MNI China 10-year CGB Yield Index read 46.1 in June, down from 52.6, with 28.9% of traders seeing a fall in the curve, and 21.1% predicting a rise.

Full report PDF available here:

MNI China Liquidity Index June 2023.pdf