MNI Liquidity Survey: PBOC 'Comforts' Market in Default Gloom

-- Liquidity Conditions Loosen After Short-term Tightness in May-End 

-- Higher Money Mkt Rates Expected To End of June 

-- Traders See Bond Market Rally Due Weaker Economic Outlook in H2

     BEIJING (MNI) - The liquidity condition in China's interbank market has

been comfortable in the last two weeks after the central bank pumped cash to

allay concerns of rising bond defaults from the financial deleveraging campaign,

according to a survey of participants by MNI.

     More traders reported an improvement in liquidity than in April, the survey

found: 58% vs. 16% in April. The proportion of traders who thought current

policy has an easing bias was 42%, the second-highest this year, compared with

32% surveyed last month.

     The survey gauged the opinions of 19 traders with financial institutions

operating in the interbank market, the main funding source for financial

institutions and the country's platform for trading money market products, bond

and currency instruments. Interviews were conducted by phone from May 28 to June

7.

     "The market was given some comfort after a short-term tightness at the end

of May, and the 7-day repo has been far less volatile," said a trader with a

city commercial bank in central China. "Regulators have been taking care of the

market and big banks are willing to lend given ample funding," he said.

     --LOOSENING GRIP

     The PBOC loosened grip on liquidity to calm fear of rising bond defaults,

as deleveraging made refunding more difficult, the trader said.

     The central bank poured CNY410 billion into the interbank market by open

market operations (OMOs) in the end week last month, the largest since the week

of April 14. It also pumped CNY 463 billion through Medium-term Lending Facility

on June 5, the biggest MLF operation since October 2017.

     Those massive injection worked. Yield on the benchmark 10-year China

Government Bond has fallen by 3 basis points as to June 7 from a peak of 3.710%

on May 17. The daily fixing of the 7-day repo rate dropped to 2.9% on Thursday

from 4.0% on May 30.

     "There are still concerns what may happen at the end of June," even after

additional liquidity helped boost market sentiment and stability, said a trader

with a city commercial bank in eastern China. 

     --LIQUIDITY DRAIN

     A range of factors may drain liquidity, including lenders meeting quarterly

Macro-Prudential Assessment, corporate tax payments, banks' handing over reserve

requirement to the central bank, and financial institutions complying with

regulatory demand to cut leverage and risky investments, he said.

     MNI survey result confirmed these concerns. About 58% respondents expected

the benchmark 7-day repo rate to rise over the next two weeks, up from 5.3% in

the previous survey and was the highest this year.

     Most respondents expressed optimism over the current economic performance.

Of the 19 traders in the MNI survey, 32% said current economic conditions are

better, the most since last October, compared with a 5.3% in April survey.

     However, concerns over the economic outlook have grown, contributing to

expectations of lower CGB yields. About 37% of traders in MNI survey said CGB

yields would fell in next three months, the most in one year and up from 26%

last month.

     "Although main data indicators performed well so far, I do not think it is

sustainable, particularly when the overall funding situation is deteriorating

under the pressure of deleveraging and credit tightening," said a trader with a

commercial bank in eastern China.

--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 Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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