MNI CHINA LIQUIDITY SURVEY: Conditions Looser; Rates Lower

--MNI Nov China Liquidity Conditions Index 12.5 From 66.7 Oct

     BEIJING (MNI) - Liquidity conditions improved markedly in November as the

People's Bank of China moved to help a slowing economy, the latest MNI China

Liquidity Survey showed.

     MNI's Liquidity Conditions Index fell sharply in November, dropping to 12.5

from 66.7 in October, with 83.3% of the respondents reporting an improved

situation. It was the lowest reading since June and the second lowest this year.

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

participants.

     There was also a diminished cash need, with one Shangdong-based survey

respondent noting a limited requirement for tax payments in November.

     With liquidity seen as 'reasonable and ample', some survey respondents

didn't expect further injection from the PBOC given the rising inflation levels.

     --DETERIORATING ECONOMY

     There were few signs of a pick-up in the economy, with the Economy

Condition Index falling to 25.0 in November, down from 29.2 last month. It was

the first fall in recent three months. It underlined concerns -- 33.3% of the

respondents saw the economy as unchanged on October and 58.3% saw it worse.

     One trader at a commercial bank was pessimistic on the economy, noting that

the government's fiscal boost had already done "its most powerful part".

     China's PPI (-1.6% y/y), retail sales (7.2% y/y) and fixed asset investment

(5.2% y/y) all marked the lowest reading in the year. Industrial output which

rose 4.7% y/y, its second lowest gain this year.

     --LOOSE BIAS, BETTER GUIDANCE

     The PBOC Policy Bias Index slipped to 25.0 in November from 45.8 recorded

in October, underlining the looser bias perceived by financial markets. The

reading, in line with the liquidity condition index, is the lowest since June.

     The PBOC Guidance Clarity Index was 66.7 in November, up from the 58.3 in

October. Although higher, the index didn't indicate a fall in guidance clarity,

just a greater number expressing no change in clarity from the pervious month.

     --RATES CUT

     The 7-Day Repo Rate Index dropped to 41.7 in November, down from the 54.2

in October, with three quarters respondents forecasting a flat or falling curve.

The 10Y CGB Yield Index fell to 61.1 in November, compared with October's 75.0.

     The lower rate indices came after PBOC's 5 bps rate cut for the Medium-term

Lending Facility (MLF) on Nov 5 (from 3.30% to 3.25%) and the 1-year Loan Prime

Rate was cut by 5bps to 4.15% on November 20.

     "The 7-Day repo rate is higher into month end, but over the next two weeks,

the curve is going to fall," a Guangzhou based trader replied to the MNI survey.

"The MLF rate cut has a guiding effect towards the 7-Day repo," the trader

added.

     An additional question to this month's survey was whether traders think

PBOC will further cut the MLF rate within the year. The idea was rejected by

66.7% of respondents, saying the central bank will take a wait and see approach,

particularly with inflation tensions building.

     The MNI 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 Nov 18 - Nov 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

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