MNI CHINA LIQUIDITY SURVEY: Conditions Tighter; Policy Prudent

--MNI Oct China Liquidity Conditions Index 66.7 From 57.1 Sept

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

with tax payments and control of conditions by the People's Bank of China all

pressuring, the latest MNI China Liquidity Survey showed.

     MNI's Liquidity Conditions Index rose to 66.7 in October from 57.1 in

September, indicating moderately tighter conditions than in the previous month,

with 9-in-10 respondents reporting liquidity the same or tighter. The higher the

index, the tighter liquidity appears to market participants.

     "You can tell from higher overnight repo rates, along with October timing

regarding tax payments, that liquidity is getting tighter this month," a Nanjing

based trader told MNI.

     --PRUDENT POLICY

     The PBOC Policy Bias Index edged up to 45.8 in October from September's

32.1 recorded in September, with three-quarters of replies seeing the PBOC

maintaining its current policy bias. The Clarity Index, effectively showing how

well the PBOC was communicating its position, fell to 58.3, with more than 80%

of responders seeing clear and effective messaging from the central bank.

     Open market operations are now used "precisely" to manage liquidity and

signals from the central bank are delivered smoothly and clearly, a city

commercial bank trader said.

     --ECONOMY IMPROVING

     The Economy Condition Index rose for a second month to 29.2 in October,

after touching 21.4 in September, with a slightly higher 17% of replies saying

economic data was looking better. But overall, more than half of replies are

still concerned over the outlook.

     "Short term, (indicators) are okay, but it is not the case in longer-term,"

a Shanghai fund manager said.

     "The Economy is slowing down obviously, given property and infrastructure

investment are limited as well as the less drive from finance sector; I'm

pessimistic (on the outlook)," a southeast bank trader told MNI.

     --CURVE STEEPENS

     There was divergence in the rate outlook, with a sharp fall in the 7-day

repo Index and a spike higher in the 10-year CGB yield Index as traders look for

a steeper curve ahead.

     "Long-end yields may go up first. The gloomy economy doesn't yet provide an

environment for looser policy, and secondly, the treasury yields might rise

after falling for almost a year," a Shandong-based trader said.

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

PBOC will further ease its policy. The idea was rejected by 58.3% of respondents

who see the central bank sticking to its current policy, with the package of

tools, including open market operations and Loan Prime Rate (LPR) seen as

effective and flexible. The PBOC also needs to consider inflationary and

depreciation pressures as well before any policy adjustment.

     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 Oct 21 - Oct 28.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Beijing Bureau; tel: +86 (10) 8532-5998; email: flora.guo@marketnews.com

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