MNI CHINA LIQUIDITY SURVEY: PBOC Easing Ongoing, Pace Slows

--Surge In Numbers Seeing Lower Liquidity, Albeit From Elevated Levels

--Concern Over China Economic Downturn Surges To Survey High

--No Clear 10-CGB Yield Direction From Survey, Inflation A Concern Though

     BEIJING (MNI) - China's interbank market saw liquidity fall in August from

the elevated levels seen in the previous month, with the number of traders

experiencing deteriorating liquidity conditions at the highest level since

April, the latest MNI China Interbank Survey shows. 

     The percentage of traders seeing lower liquidity levels rose to 38.9% in

August, the highest since April, and up from zero in July.

     Liquidity remained ample in August, despite slowing from July's level.

However, there was increased rate volatility, despite the central bank

maintaining its overall easing stance, as the pick-up in local government bond

issuance sucked up liquidity and the People's Bank of China slowed its injection

of short-term funds.

     "Although liquidity was still not tight in August, it was not as ample as

in July," a Beijing trader from a joint-stock bank told MNI, citing large LGB

issue and the PBOC's reduction of open-market operations amongst the reasons.

     Although a majority of respondents said the PBOC remained generous in

August, 5.6% of traders said their stance has started to revert, up from zero in

both the June and July readings.

     --ECONOMIC WORRIES

     Pessimism over the economy rose again in August. A total of 88.9% of

respondents expressed disappointment with the economy, the most since the survey

began in May 2014. Concerns over the economy have been growing since May, when

26.3% of traders saw economic conditions as worse than in the previous month.

     "If you look at the main data indicators, the economy is getting worse,"

said a Shanghai trader with one of the big four state-owned banks.

"Infrastructure investment and consumption are both showing weaker growth. But

we have seen the central government has taken measures to stimulate growth,

including boosting infrastructure and expanding credit, so the outlook may be

not as bad as expected," he added.

     There is no consensus opinion as to where 10-year CGB yields will be in

three months. Responses for rising and falling yields both stood at 38.9%.

However, 17 respondents addressed concerns for rising inflation in H2 with goods

price picking up.

     --RATE VOLATILITY

     Fewer traders saw room for the seven-day repo rate to fall, as liquidity

would likely tighten due to increased LGB issuance and rising cash demand ahead

of the week-long Oct 1 holiday. A total 16.7% respondents see the rate falling

over the next two weeks, the lowest since January and down from 26.3% in Aug

2017.

     The volume-weighted average rate of the benchmark seven-day deposit repo

traded in the interbank market swung from a low of 2.2480% on Aug 8 to a high of

2.6739% on Aug 22, a range nearly twice that seen in July.

     The PBOC skipped open-market operations on 19 out of 23 trading days in

August, although it kept the floodgates open for longer-term capital via a net

of CNY195.5 billion in one-year middle-term lending facility and CNY100 billion

in three-month cash deposit in commercial banks. As a result, August saw the

central bank inject a net CNY245.5 billion into the interbank market.

     The Market News survey gauged the opinions of 18 traders with large

financial institutions operating in the Chinese 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 Sep 3

to Sep 6.

--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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