MNI CHINA LIQUIDITY SURVEY: Conditions Seen Tighter In July

--MNI China Liquidity Conditions Index Jumps To 64.3 From June's 8.3

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

July, driven by net drains by the Peoples' Bank of China, the latest MNI China

Liquidity Survey showed.

     MNI's Liquidity Conditions Index jumped to 64.3 in July, which reflects

57.1% respondents reporting tighter liquidity this month. The higher the index,

the tighter liquidity appears to market participants.

     This reflects a very different situation from the ample liquidity seen in

June when the index stood at just 8.3 and no traders reported tight conditions.

     July's tighter liquidity was also a reaction to market caution following

the interventions at Baoshang Bank and Jinzhou Bank, one commercial bank trader

told MNI.

     A trader based in Guangzhou said the tighter conditions were a "structural

tightening rather than a total one, which is able to keep a balance in the

market," as he noted the PBOC is managing liquidity via multiple measures,

including open market operation and MLF.

     The central bank drained a net CNY414.3 billion in July via its open market

operation, treasury cash deposits at commercial banks, MLF and TMLF, according

to Wind.

     Overnight repo rates surged to 2.61% at the end of July compared with the

1.39% at the end of June, while the 7-day repo rate rose to 2.65%, compared with

2.50% a month ago.

     --OUTLOOK BRIGHTER

     The economy condition index rose to 39.3 in July, the highest in Q2, from

June's 20.8, with 64.3% of respondents seeing the economy flat or better,

although 35.7% of traders surveyed still hold a pessimistic outlook on the

economy.

     "The economy is improving ... but could dip in the second half," a Beijing

fund manager said.

     Industrial output grew 6.3% y/y growth in June, up from the year low 5.0%

y/y reported in May. Fixed-asset investment rose 5.8% y/y in Jan-Jun period from

5.6% y/y previously, while retail sales increased 9.8% y/y in June from May's

8.6% y/y gain.

     --DIRECTIONAL POLICY

     The PBOC Policy Bias Index rose to 46.4 in July from 20.8, with 64.3% of

respondents' confirming their outlook of continued stable policy. "Prudent" was

the buzzword mentioned by most through the survey.

     The Guidance Clarity Index slipped to 60.7 in July after hitting 79.2 in

June, but still sits at an elevated level as traders still feel they are

receiving clear guidance from the central bank.

     "The PBOC has been using multiple tools to guide the market, neither too

tight nor too loose," a bank trader based in Shanghai said, with another trader

noting "better communications" between the central bank and markets".

     --LOWER RATES

     The 7-Day repo rate index, as a gauge measuring the short-term liquidity,

fell to 35.7 from June's 79.2. Lower rates are usually seen at the beginning of

the month, after month-end capital adequacy tests are passed.

     The 10-Year government bond yield index, which reflects longer-term

economic conditions and shorter-term funding conditions, rose to 39.3 in July

from 20.8 in June, as more traders saw a narrowing range of economic

uncertainties and therefore a tighter rate band.

     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 Jul 22 - Jul 29.

--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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