MNI CHINA LIQUIDITY SURVEY: Conditions Improve, Economy Gloomy

--MNI China Liquidity Conditions Index Edged Down To 57.1 From August's 65.4

     BEIJING (MNI) - There was a modest improvement in liquidity conditions

across China's interbank market in September as the central bank moved to ease

seasonal factors, according to the latest MNI China Liquidity Survey, although

there are some concerns could conditions could tighten in coming months at the

People's Bank of China seems set to maintain a prudent stance.

     MNI's Liquidity Conditions Index edged lower to 57.1 in September after

sitting at 65.4 last month, indicating moderately improved conditions. The

higher the index, the tighter liquidity appears to market participants.

     In total, 28.6% of respondents saw easier conditions, sharply higher than

August's 7.7%, but those seeing the situation worsen rose to 42.9% from 38.5%.

     "The PBOC's reserve requirement ratio cut helped relax the liquidity

shortage caused by tax payment and local government bond issuance," a Shanghai

trader told MNI, referring the central bank's the cross-the-board RRR reduction

effected on Sep 16, which released CNY800 billion.

     According to Wind, a China data information provider, the central bank has

injected a net of CNY885 billion via the RRR cut and open market operations

between Sep 16 and 23.

     --EASING BIAS

     The survey shows traders by-and-large think the current policy bias is

"loose", with the Policy Bias Index slipped to 32.1 from its previous 34.6, with

half the participants seeing the stance easing.

     The stance was not expected to change in the near term, with one trader

from a commercial bank pointing to the need for a stable market over the coming

National Day celebrations.

     Despite the injections, there were some who still saw no great improvement

in conditions, with one trader pointing to higher money market rates. Another

said disappointment over the PBOC not trimming the rate for the medium-term

lending facility added to the sentiment.

     The 7-day drepo rate (DR007), the key indicator of the liquidity in the

interbank market, averaged at 2.30% so far in September, compared with 2.67%

last month.

     --GLOOMY ECONOMY

     The sentiment over the economic outlook improved moderately, although it

remains gloomy overall. The Economy Condition Index inched higher to 21.4 in

September, after 15.4 in August, with slightly fewer respondents -- 64.3% versus

76.9% last month -- expressing greater concern for the economy.

     "Although the economic indicators sent negative signals, we can see the

government is pushing investment, which will boost the economy later this year,"

a Shanghai trader said.

     The survey added a question collecting traders' opinions on inflation

prospects, and 78.6% of the traders see inflation stuck at current levels.

Almost two-thirds of respondents thought inflation could be a restraint on

future PBOC easing.

     The MNI survey collected the opinions of 14 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 Sept 17 - Sep 23.

--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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