MNI CHINA LIQUIDITY SURVEY: Ample Liquidity Seen, Weak Economy

--MNI China Liquidity Index At One-Year Peak

--Monetary Policy Seen Loose; Transparency Improving 

--Economy Still Weak; 10-Year CGB Yield Slide

     BEIJING (MNI) - Liquidity across China's interbank market picked up in

June, the latest MNI China Liquidity Survey shows, helped by the People's Bank

of China injecting a net CNY107 billion via open market operations at the same

time it raised the ceiling on short-term financing balances for securities

traders.

     The June MNI China Liquidity Index saw 83.3% of respondents reporting

liquidity conditions improving from last month, marking the highest level since

July last year. All other respondents saw no change in the overall situation. 

     The market was able to enjoy and extend loose liquidity through the PBOC's

actions, one Nanjing-based trade told MNI, although he noted that

'stratification' was in place and not all institutions had equal access to

funds.

     The stratification arose following the central bank's takeover of Baoshang

Bank, increasing tension across the money market and leading to medium- and

small-sized banks and non-financial institutions suffering from liquidity

shortages.

     --CLEARER GUIDANCE

     The PBOC certainly can't be faulted in its forward clarity according to the

survey, with all respondents seeing the central bank's  guidance as better or

unchanged on last month.

     "By sustaining recent OMO, MLF and SLF operations, the PBOC is sending

signals that it will stabilize the market," a trader based in Guangzhou told

MNI.

     All respondents equally saw PBOC policy unchanged to leaning further

towards easing, with nearly 60% seeing a loosening since last month. This is a

big change over recent months, when the survey pointed towards a tighter stance.

     -- ECONOMY CONCERNS

     Concerns over the economy are growing, with 58.3% of respondents holding a

pessimistic outlook for the economy, up from 50% in May. China's May

macroeconomic indicators continued to show weakness -- industrial output slowed

to 5.0% y/y, and fixed-asset investment (FAI) slipped to 5.6% y/y, both recorded

the year low.

     Confidence was further dented by the China/U.S. trade talks stalling.

     -- 10-YEAR YIELDS LOWER

     As concerns grow over the outlook, so expectations of lower CGB yields

grow, with two-thirds of respondents seeing 10-year yields lower three months

out.

     "Markets are expecting an almost 100% likelihood of rate cut by Federal

Reserve in July and given current (over 100 bp) gap between 10-year CGBs and

Treasuries, China yield may slide," a trader with a Shanghai-based bank said.

     The 7-day repo rate, another measure of the short-term liquidity, is

expected to rise by 75.0% of the traders, pushed higher by "end month effects".

     The survey collected the opinions of 12 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 from Jun 18 - Jun 25.

--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

[TOPICS: MAQDS$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MN$MM$,MN$RP$]