MNI CHINA LIQUIDITY INDEX: Liquidity Flows; Economy Worsens

--MNI Feb China Liquidity Conditions Index 0.0 From 84.6 Jan

     BEIJING (MNI) - Liquidity flowed through the China interbank market in

February, boosted by huge liquidity injections by a central bank looking to

tackle the impact of the coronavirus outbreak, the latest MNI Liquidity

Conditions Index shows.

     The index dropped to a record low 0.0 in February, with 100.0% of the

respondents reporting a loosening in conditions from the previous month. That

compared to a reading of 84.6 in February

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

participants.

     The PBOC injected CNY1.2 trillion into the market via reverse repos on the

first trading day after the week-long New Year holiday as it sought to steady

the financial markets.

     --CONDITIONS INDEX SLUMPS

     The severity of the virus outbreak impact on the economy can be best judged

by the slump in the Economy Condition Index, which also fell to 0.0 in February,

down from 57.7 in January.

     Not only were there concerns over slowing growth, but also of rising

prices, with one Guangdong-based trader saying transportation issues "will push

up prices, including those for raw material and labour costs".

     China's GDP grew 6.0% y/y in Q4 and 6.1% y/y over the whole of 2019, but

forecasts have been dramatically reduced for Q1, with some commentators seeing

negative growth for the quarter.

     The PBOC Policy Bias Index fell to 26.7 in February from 38.5, with nearly

half of respondents seeing current central bank policy as loosening. The other

half still see the PBOC policy as "prudent", not seeing the current moves to

underpin the economy and loosening measures.

     Although there is disagreement as to whether PBOC moved are 'loosening'

moves or not, the Guidance Clarity Index climbed to an 8-month high 73.3, up

from January's 46.2 as more respondents understood the central bank's clear

message.

     --BOND OUTLOOK LITTLE CHANGED

     The 7-Day Repo Rate Index ticked up to 56.7 in February from the 34.6

reported in January. The 7-day weighted average interbank repo rate for

depository institutions (DR007) closed at 2.0704% Tuesday, higher/lower than the

policy rate of 2.50%.

     The 10Y CGB Yield Index inched lower to 53.3, a 5-month low, from 54.5 in

January, with around one-third of traders seeing rates higher three months out

as the virus clears. However, just over a quarter of those surveyed saw yields

falling further as the outbreak inflicts further damage on the economy.

     This month's special question asked traders "do you think the MLF rate will

be lowered further in the first half?" A majority though no, expecting the virus

to be brought under control.

     The PBOC injected over CNY3 trillion into the system as of close Feb-25,

cutting the 7-day and 14-day repo rates by 10 bps respectively on Feb 3, with

both the timing and extent outside market expectation.

     The MNI survey collected the opinions of 15 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 10 - Feb 21.

--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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