MNI CHINA LIQUIDITY SURVEY: Conditions Remains Tight in August

--MNI China Liquidity Conditions Index Climbed To 65.4 From July's 64.3

     BEIJING (MNI) - The People's Bank of China kept a tight hold on interbank

liquidity conditions through August, according to the latest MNI liquidity

survey, although there was still an overall perception of looser central bank

policy.

     MNI's Liquidity Conditions Index inched higher to 65.4 in August after

settling at 64.3 in July, indicating moderately tighter conditions than in the

previous month. 

     Overall, 38.5% of respondents saw tighter conditions, below July's 57.1%,

but those seeing the situation unchanged rose to 53.8% from 14.3%. The higher

the index, the tighter liquidity appears to market participants.

     --LOOSER OVERALL POLICY

     The PBOC Policy Bias Index slipped to 34.6 in August from 46.4 previously,

with almost 40% of respondents seeing some central bank loosening.

     "The (loose) external environment does not provide a solid backdrop for an

over-tight stance domestically and the current stance is what the central bank

would like to see," said a Nanjing based trader told MNI.

     One Shanghai fund manager believed policy needs to ease further, "to act in

concert with the new launch of the LPR." 

     The PBOC Guidance Clarity Index rose to 65.4, up from July's 60.7, with

more traders saying they were getting clear guidance from the central bank, with

one Guangzhou based trader noting better communication between banks and the

PBOC leading to a better understanding of policy.

     --ECONOMY DETERIORATING

     The Economy Condition Index plunged to a 12-month low 15.4 in August, after

39.3 in July. More than three-quarters of respondents expressed greater concern

for the economy in the wake a weak set of July data.

     "Economic indicators are really bad, meantime, the yuan's foreign exchange

rate is falling ... the economy is tough," the Shanghai fund manager said.

     There were some positive voices around, looking for fresh government action

to support the economy. "The government is supportive, thus the economy won't

get too bad," a Shandong based trader said.

     --HIGHER RATES

     The 7-Day Repo Rate Index rose to 61.5 in August, much higher than July's

35.7, with almost half of the respondents agreeing that current rate is

"comfortable" and is likely to be maintained for now. 

     The 10Y CGB Yield Index jumped to 53.8 in August from 39.3 previously, a

four-month peak, with 46.2% of the respondents believing the yield will

fluctuate in a narrow range. Others point to higher rates, believing yields have

touched bottom.

     An additional question this month asked whether traders saw the

introduction of the new loan prime rate (LPR) as an outright moving ease by the

PBOC. The idea was rejected by 84.6% of respondents who didn't consider it a

central bank rate cut as the LPR rate will be decided by commercial banks by

adjusting weights.  

     The MNI survey collected the opinions of 13 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 Aug 20 - Aug 26.

--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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