The MNI China Money Market Index (MMI) was formerly the MNI China Liquidity Index, and has been adapted to reflect the PBOC's monetary policy. The survey was conducted prior to the PBOC’s latest monetary easing, which saw the bank lower several of its key benchmarks including a 20-basis-point cut to its 7-day repo rate. (See MNI:More RRR Cuts Would Pave Way For China Bond Sales-Advisors)
“There are nearly CNY1.5 trillion OMO and MLF maturities during the month,” noted a trader with a state-owned bank in Chengdu, adding the gap had widened due to the PBOC’s decision to conduct MLF operations on the 25th of each month from the previous 15th.
About CNY591 billion in one-year MLFs are set to mature this month.
“Big banks are lacking the medium- and long-term funds, their lending capacity is declining,” another trader added, pointing to the CFETS-NEX money-market sentiment index which stood at 67 on Sept 19. A higher reading denotes tighter liquidity conditions, with 50 representing an equilibrium.
The central bank announced on Tuesday it would cut reserve requirement ratios by 50 basis points and unlock about CNY1 trillion into the interbank market, which will smooth liquidity conditions, but further OMO operations will be undertaken with more caution.
The PBOC’s injections over the last month were sufficient to meet demands, according to 62.8% of traders, despite the 7-day repo rate for deposit-taking institutions (DR007) reaching 2.1% in September, indicating unsatisfying liquidity conditions. DR007 is a money market rate benchmarked by the PBOC’s key 7-day repo rate.
“Too much money in the pool may cause some ‘idle funds’ which the authorities do not want, thus the tight balance will be maintained,” said a Hefei-based trader.
However, 51.2% of survey participants see wholesale market liquidity conditions easing over the coming month, with 74.4% expecting DR007 to decline in October.
“The Bank will add OMO to hedge maturities towards the end of September,” a Hebei-based trader added, noting the Bank will use October’s week-long holiday to inject further liquidity.
POLICY STANCE
Market players expect further easing, with 60% of those surveyed seeing looser policy in the next six months. The current policy bias subindex printed at 33.7, up from last month’s 16.3, with 67.4% of local traders expecting the central bank to stick to its accommodative stance.
“More than CNY4 trillion of MLF will mature from September to December, which is a large funding gap,” noted a Beijing trader, adding the bank could lower RRRs to replace part of the maturing facility and supplement low-cost funds for banks.
“The [Federal Reserve] cut will also expand the monetary policy operating space,” said a trader based in Zhejiang. “Easing measures are strongly expected on the back of limited fiscal policies as well as improving external environment.” (See MNI: Fed Cut To Help PBOC Ease, Yuan Strengthen)
BOND TRADE
Traders are watching the PBOC’s attempt to control treasury yields closely amid the recent and unexpected fixed-income rally.
“The recent fall of long-dated bond yields happened faster than expectations, reflecting investors' strong sentiment,” the Zhejiang trader said, predicting long-term treasury yields would edge down further.
About half of respondents expect the bank to continue to trade treasuries over October, however, opinions on volume diverged with 16.3% of participants predicting an increase, while 30.2% anticipated a decrease.
The MNI survey collected the opinions of 43 traders operating in China's interbank market between Sept 9-20.