MNI CHINA LIQUIDITY SURVEY: PBOC Offers Ample Largesse In June

--Further RRR Cuts Expected In Next Three Month: Traders

--Bond Market Remains Bullish Next Quarter, And Economy Gloomy

--PBOC Will Likely Keep Loosening Liquidity In July: Survey

     BEIJING (MNI) - China interbank market cheered the largesse of the central

bank in June after the People's Bank of China opened the liquidity floodgates to

head off the usual June anxieties over a destabilizing cash crunch and soothe

concerns over an economic slowdown.

     The PBOC has provide ample liquidity in recent months, as the previous

moves to slow flows to reckless investors shook economic fundamentals,

generating corporate bond defaults.

     A total 18 out of 19 traders who took part in the latest MNI monthly

interbank survey reported an improvement in liquidity conditions -- a first

since the poll began in May 2014. 

     The previous high -- 89.5% of respondents -- came in October 2017 when the

PBOC started to flood the market with liquidity to ensure stability during the

19th Party session.

     The MNI survey gauged the opinion of 19 traders at 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 June 27-July 6.

     --LOOSENING BIAS

     Traders attributed cash adequacy to a combination of factors, including

central bank generosity to help buffer economic headwinds and offset any impact

from the China-U.S. trade dispute.

     Thanks to the central bank's loosening policy, "we had the most comfortable

June in the past two years," a trader with a city commercial bank in eastern

China told MNI. "There was no feeling of a quarter-end crunch at all."

     Although the central bank drained a net CNY210 billion from the interbank

market via open market operations in June, compared with a net CNY630 billion

injection in May, with adds via medium-term lending facility effectively

offsetting the drain in OMOs. The PBOC added an addition net CNY403.5 billion

via MLF in June, the biggest since Dec 2016.

     The PBOC has managed to hold the benchmark seven-day drepo rate relatively

stable in June, avoiding the large spikes that have tended to be a feature of

quarter-end months. The volume-weighted average price of the seven-day drepo

fell below 3.0% on most days of the month.

     The majority of respondents in the MNI survey -- 84.2% -- see the central

bank's policy bias as loosening, also a survey high. That view has been backed

up by the outcome of the PBOC monetary policy committee quarterly meeting in

June. The committee replaced the expression of keeping liquidity "reasonable and

stable" with "reasonable and adequate".

     --BRIGHT FUTURE

     The largesse appears to have given the market a sense of security, with

57.9% of participants believing the benchmark 7-day drepo rate will fall in next

two weeks, up from 21.2% last month.

     The majority of traders expect the PBOC to further unlock liquidity by

conducting another RRR cut in next three months, as risks in financial system

accumulate due to squeezed credit.

     --GLOOMY ECONOMY

     Traders also though the recent rebound in the bond market has further to

go, with 47.4% seeing the yield on benchmark 10-year government bonds (CGB)

falling over the next three months, up from 21.2% in May's survey and the

highest percentage since Sep 2015.

     Fading optimism over the economic outlook is contributing to expectations

of lower CGB yields. Of the 19 traders in the MNI survey, 57.9% said current

economic conditions have deteriorated, the highest percentage since August 2017.

--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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