MNI CHINA LIQUIDITY SURVEY: PBOC Liquidity Still Tight In May

--MNI China Liquidity Index At 41.7% In May

--Monetary Policy Seen Steady; Transparency Improved 

--Economy Still A Concern; 10-Year CGB Yield Waver

     BEIJING (MNI) - Liquidity in China's interbank market remained tight in

May, with tax payments and a less expansive policy stance by the central bank

acting as a drain, the latest MNI China Liquidity Survey shows.

     The May MNI China Liquidity Index saw 41.7% of respondents reporting

liquidity conditions deteriorating further from April's level, with a further

33.3% seeing the situation unchanged. Last month, 64.3% saw conditions worsen

from the previous month. 

     The takeover of a troubled commercial bank, Bao Shang Bank, by the People's

Bank of China spooked the money market, raising concerns of tighter conditions

and regulations.

     One Nanjing-based market trader noted appropriate conditions through the

early part of the month, although tightening in the last week.

     --STEADY POLICY

     Three quarters of the participants think the PBOC has and will keep

monetary policy steady in the coming period, with a further 16.7% expecting a

tightening in response to "yuan depreciation as well as inflation pressure"

     The survey highlighted that the PBOC has endeavoured to implement policy

with increased transparency and effective communication, with 83.3% of the

traders saying that the PBOC is performing well, or no worse than its recent

efforts, with 16.7% seeing a further improvement in standards

     "The PBOC is still making efforts to ensure 'smooth' communication with

institutions to stabilize market expectations," was one traders evaluation of

the current situation.

     -- GLOOMY OUTLOOK

     Despite satisfaction with the PBOC's actions, the economic outlook still

remains sluggish as best, with traders seeing no pick-up from April. Half of the

traders saw no change in the current economic condition, with the other half

concerned data will be weaker. In April, no survey respondents saw a worsening

of economic condition.

     The downbeat outlook has had little impact on the outlook for 10-year CGB

yields, with 41.7% of the participants seeing yields unchanged over the nest 3

months, with 25.0% seeing them higher and 33.3% lower. One trade noted that

rates will likely trend sideways until the data shows a clearer trend.

     The 7-day repo rate, another measure of the short-term liquidity, is

expected to rise by a year-high 66.7% of the traders, driven by "end month

effects", with the balanced divided equally between unchanged and lower.

     The survey collected the opinions of 11 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 May 21 - May 28.

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

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

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

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