MNI CHINA MONEY WEEK: Green Shoots Trimmed As Floodgates Close

By Anthony Barton

     LONDON (MNI) - Last week, the global focus fell firmly on the "green

shoots" of recovery springing across China's economy. Fast forward not even 10

days and we have had soggy European and South Korean data, a swathe of global

central banks turning dovish and more guarded activity in the Chinese financial

markets.

     At least on the Chinese markets side, the cause seemingly lies in the

statement issued at the end of last Friday's Politburo meeting.

     The statement appeared to indicate a focus on longer term structural reform

in China, alongside targeted measures, as opposed to supporting the economy

through broad based stimulus. The statement also dropped a reference to "keeping

liquidity reasonably ample."

     This has been followed up by the PBOC with a round of the Targeted

Medium-Term Lending Facility, the second of its kind since inception late last

year, with policymakers highlighting that we should now expect such operations

on a quarterly basis. Elsewhere, the PBOC has outlined provisions to promote

further targeted lending, giving credence to the idea that policymakers aim to

focus more on efforts that will feed through to the real economy, in turn

avoiding the effects of "flood-like" stimulus.

     On the liquidity front, this week's open market operations drained some

CNY300bn out of the system after the central bank added CNY300bn last week. As a

reminder, last week's MLF injections only resulted in a near 55% rollover of the

maturing provisions.

     Tighter liquidity was highlighted in the latest MNI China Liquidity Survey,

with 64.3% of survey respondents noting a deterioration on the previous month --

albeit slightly lower than the 71.4% who saw tighter conditions in March, but

still representing a cumulative tightening in liquidity measures.

     This has left Chinese equity markets on the defensive after the recent

stellar run higher, as investors remain wary of tighter purse strings in the

case of both the PBOC and the government.

     In the fixed income market, the pullback in Chinese equities has allowed

CGBs to stabilise, with 10-Year yields around 4.0bp off their recent highs, but

still sitting close to 35bp higher than they did at the end of March.

     U.S. Dollar/Yuan crosses remain range bound, although the WSJ has pointed

to the potential for an onshore USD shortage in China, while Chinese President

Xi noted that China "won't pursue yuan depreciation that harms others" as he

pledged to keep the currency at a stable level around equilibrium. This was

enough to push USD/CNH comfortably back into its recent range after a look above

CNH6.7500.

     Looking ahead, the global focus remains on the health of the Chinese

economy. One Shanghai trader noted that the positive economic expectations would

push China yields higher for a while, but they would reverse as the overly

optimistic mode gets corrected, underlining doubts among some traders over the

sustainability of the recovery.

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

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