MNI China Liquidity Survey: Mood Brightens as PBOC Opens Gates

--Central Bank Adds Funds to Stabilize Market Ahead of Week-Long Holiday 

--Traders Still See Benchmark Repo Rates Moving Higher 

     BEIJING (MNI) - The mood in China's interbank market brightened this month

after a dismal July and August that saw record numbers of traders complaining

about tight liquidity, results of the Market News International monthly

interbank survey show. 

     The People's Bank of China was particularly generous with its funding amid

the usual quarter-end tightness as banks hoarded cash and put their balance

sheets in order to ensure they passed the central bank's quarterly

Macro-Prudential Assessment (MPA) tests at the end of month. Banks were also

preparing to meet a seasonal surge in demand for cash from individuals and

companies in the run-up to the annual week-long public holiday, known as Golden

Week, that starts Oct. 1. 

     On top of that, there was pressure from corporate tax payments and maturing

negotiable certificates of deposit (NCDs). Data from Wind Information show that

a total CNY2.25 trillion of NCDs are due to mature in September, the most since

banks were first allowed to offer the certificates in 2013. Even the Ministry of

Finance bought back CNY560 million of one-year bonds in the secondary market to

boost liquidity, a policy it started in September last year. 

     The PBOC injected a net CNY336.5 billion via open-market operations and

medium-term lending facility last week, after draining a net CNY221.5 billion

the previous three weeks. It also offered CNY298 billion of loans to selected

banks through its Medium-term Lending Facility (MLF) on Sept. 7 to offset the

almost CNY283 billion of loans maturing this month. 

     The central bank's largesse lifted sentiment, with 26% of the 19 traders

who took part in the MNI China Liquidity Survey reporting an improvement in

liquidity conditions. It was the first pick-up since May and up from zero in the

July and August surveys, which were the worst response rates since the poll

started in 2014. The percentage of respondents who said liquidity conditions

deteriorated fell to 42.1% from 94.7% in August and 100% in July. 

     MNI gauged the opinions of 19 traders with financial institutions operating

in the interbank market, the country's main platform for trading money-market,

bond and currency instruments, and the main funding source for financial

institutions. Interviews were conducted from Sept. 18-21. Large banks,

especially state-owned lenders, are the biggest providers of liquidity to the

market. 

     "The central bank's priority is to maintain stability in the banking

system," said a trader with one of the big state-owned banks in Shanghai. "There

is still large demand [for liquidity] so it will continue to inject money to

guarantee that we get over the quarter-end liquidity bump." 

     Most traders see the injections as temporary measures to smooth over demand

spikes and don't see them as a signal that the PBOC is relaxing its stance

toward the money markets. The number of traders who see the PBOC's current

policy bias as tightening more than doubled to 52.6% of respondents from 21% in

August's survey and was the highest since February, while the percentage seeing

policy as neutral was the lowest since May, with none saying policy was showing

an easing bias. 

     Smaller banks, which are more dependent on the interbank market for

funding, are being hit hardest by the policy, which is aimed at forcing

financial institutions to rein in leverage and risky investments. 

     "The problem is with the hesitation of the big banks to lend out," said a

trader with a joint-stock bank in central China. "It's really not easy to borrow

money." 

     Another trader with a small city bank in eastern China said, "Liquidity is

still tightly balanced. Pressured by the MPA and the long holiday, big banks

were reluctant to lend. It was only when the PBOC came to the rescue that they

came back into the market. Suddenly on Tuesday afternoon [Sept. 19] they opened

the taps."

     A trader with a regional bank in eastern China said it was understandable

that big banks, who provide the most liquidity, would be cautious in conducting

transactions in the interbank market given the PBOC's stated policy to keep

liquidity "neither tight nor loose." The potential for instability caused by

measures being taken by regulators to force deleveraging is pushing the big

banks to be more careful. 

     "Back in 2016 before the deleveraging campaign started, banks could get

more than enough money to cover demand for liquidity from their customers, but

now we can barely get what we need," the trader said. "Most commercial banks

have shrunk their balance sheets and the volume of reverse repo trading is

falling, so even though the PBOC made those injections in the first two weeks of

September, it didn't really make much of a dent in demand." 

     That is reflected in money-market rates. In spite of the PBOC's actions

over the past two weeks, the volume-weighted average price of the benchmark

seven-day drepo rate, which only reflects the borrowing costs of banks, rose to

2.9533% on Friday from 2.8271% on Sept. 13, the eve of the first net injection.

However, the volume-weighted average price of the benchmark seven-day repo rate,

which reflects the borrowing costs of all financial institutions, was more

volatile. It fell to 3.4754% on Friday after rising as high as 3.8964% during

the week. 

     Traders aren't expecting any let-up. More than half of the respondents in

the MNI survey, 52.6%, said the seven-day repo rate will be higher in two weeks'

time, the highest percentage since June, and up from 42.1% in the July and

August surveys. 

     But traders see more stability in government bonds. The majority of survey

respondents, 52.6%, see yields on 10-year Chinese government bonds (CGB) staying

the same over the next three months, the most since November. Just 10.5% see

yields falling -- half the rate in August, after the mini-rally that started at

the end of August sent yields tumbling -- while those seeing yields rising

represented the smallest percentage since November.  

     The yield on the most-active 10-year CGB closed at 3.6347% on Friday, up

from 3.5991% the previous Friday, the biggest weekly basis-point jump in four

weeks. 

     There are several factors weighing on traders' views about bond yields,

including liquidity and the economy. Although fewer said current economic

conditions are worse than before, they still represent the biggest proportion of

respondents in the survey at 47.4%.  

     Economic activity last month increased at a slower pace than analysts were

expecting but credit increased by more than estimated, leading to some

uncertainty about whether the activity data is reflecting real weakness in the

economy or whether other factors are at play. 

     "I'm not seeing any new driving forces to support growth," said the trader

with the small city bank in Eastern China. "But the divergence between the

economic data and the financial data is confusing. There could be some impact on

activity from the environmental-protection campaign which has led to a crackdown

on pollution by factories, but we need more time to see if that's true."

     The PBOC seems to have gone some way to restoring its credibility with

traders after a record 42% in August's MNI survey said PBOC guidance was

unclear. The proportion fell back to 15.8% this month, while the number of

respondents who said central bank guidance was better recovered to 31.6% from

15.8% in the previous survey.  

--MNI Beijing Bureau; +44 203-586-2244; email: nerys.avery@marketnews.com

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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

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