MNI CHINA LIQUIDITY SURVEY: Conditions Seen Tighter In March

--PBOC Slows Injection To Prevent Easing Expectation

--No Traders See Liquidity Conditions Looser

--Economic Outlook Remains Uncertain; 7-day Repo Rate Up In Two Weeks

     BEIJING (MNI) - Liquidity in China's interbank market was seen tighter in

March, with higher rates, seasonal cash drains and a slowing of injections by

the People's Bank of China all contributing, the latest MNI China Interbank

Liquidity Survey showed.

     A deterioration in liquidity conditions was seen by 71.4% of respondents,

up from 46.7% in February, with no respondents seeing any signs of improved

liquidity conditions.

     "Conditions have tightened since mid-month as corporate tax payments and

reserve requirement ratio deposits changes scrambled liquidity. Banks are

preparing for the PBOC's quarterly Macro-Prudential Assessment (MPA), which adds

pressure on the interbank market," a Shanghai trader at a state-owned bank told

MNI.

     Other traders agreed the central bank is changing its loosening bias at a

moderate pace and, with slower injection seen as an attempt to cool

institutions' expectations of excess liquidity.

     "I think the central bank is afraid of the market forming a one-way

expectation as institutions would add leverage aggressively if the interest

rates remain low," a trader in a commercial bank told MNI.

     --PBOC TOLERANCE

     So far this month, the has PBOC withdrawn a net of CNY692.5 billion via its

open market operations, skipping daily OMOs for 15 trading days and not rolling

over CNY432.5 billion of medium-term lending facilities.

     "Liquidity is tight as the PBOC continued to suspend its OMOs," a trader at

a city commercial bank said, "I feel the central bank is more tolerant to market

volatility."

     None of traders saw surveyed saw any PBOC easing move in March, down from

33.3% in February and the lowest since Nov, 2017, although the vast majority saw

policy unchanged on the month.

     --WIDER RANGE

     Money market rates are higher on average through March to date. The

volume-weighted average rate of the benchmark 7-day repo traded in the interbank

market, considered the best indicator of general liquidity, averaged 2.5435% by

March 25, up from the average 2.4354% seen in February.

     A majority of traders see upside room for the seven-day repo, with 42.9% of

survey respondents seeing the rate higher over the next two weeks, although

below the 53.3% who foresaw higher repo rates in the previous survey.

     "The 7-day repo rate will go up (this week) as the demand for cross-quarter

capital is rising, but conditions will get better after that," a city commercial

bank trader said, noting the mid-point of the rate will remain low as the PBOC

is trying to reduce real lending rates to stimulate economy.

     --UNCHANGED ECONOMY

     Nine out of the 14 participants saw the economic situation as unchanged,

with no obvious improvement in the data.

     As a result, almost half of respondents see 10-year China Government Bond

yields stable over the next three months, compared with 20% last month.

     Traders are concerned that a rising stock market may suck up some

liquidity, weighing on the bond market.

     The survey gauged 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 Mar 20 to Mar 26.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--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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