MNI LIQUIDITY SURVEY: PBOC Flicks On, Then Off Cash Floodgate

--PBOC Not Expected To Push Money Market Rates Higher Soon

--Stricter Financial Regulation Reintroduces Tightness

     BEIJING (MNI) - The People's Bank of China has cautiously controlled its

supply of money through January to maintain a "neutral stance with tight bias",

while assuring there will be sufficient liquidity as the Spring Festival

approaches, when spending and gifting lift demand across the economy for cash.

     The central bank has accelerated its liquidity injection from Jan 15,

following the suspension of open market operations from Dec 22 through to Jan 9.

     The earlier ease of liquidity supply calmed uneasy traders amid signs that

China's regulators had clamped down on financial dealings. Since the beginning

of the year, the central bank joined banking, securities and insurance

regulators in unleashing a series of tough rules cracking down on interbank

transactions, particularly shadow banking.

     The PBOC's move is reflected in the latest MNI China Interbank Survey. It

consulted the opinions of 20 traders with large financial institutions operating

in the Chinese interbank market, the country's main platform for trading

fixed-income and currency instruments, and the main funding source for banks and

large institutions. Interviews were conducted Jan 18-25.

     --PAUSING 'TIGHT BIAS'

     Signalling a pause in its monetary policy "tight bias" in mid-January, the

PBOC added an unexpected CNY805.5 billion through open-market operations and the

medium-term lending facility, the largest weekly injection since the week of

Jan. 14, 2017. It came on the heels of a CNY40 billion addition the previous

week that snapped a two-week withdrawal totalling CNY1050 billion.

     The central bank started to soak up excess liquidity this week through a

net drain of CNY427 billion, explaining in its daily statement that liquidity

was at a relatively high level.

     Liquidity remains sufficient in the interbank market. MNI's survey shows

that 75% of traders saw liquidity conditions improved, up from 36.84%, to the

highest level since Oct 2016. That was when the PBOC offered surplus liquidity

to keep monetary conditions and interest rates stable before a key meeting of

the ruling Communist Party.

     --LIQUIDITY POURING IN

     "Liquidity has poured in," said a trader in Beijing with one of the Big

Four state-owned commercial banks. However the trader added that it is not

likely to last and will return to 'tight and neutral' after the holiday ends in

the second half of February.

     Last year, MNI's survey before the holiday showed the share of traders

noticing ample liquidity stood at 35%, up from none in the preceeding month.

     The improvement noted by traders this year may in part be due to the excess

MLF injection of as much as CNY398 billion on Jan 15, the biggest MLF operation

since November. What is more, the so-called targeted reserve requirement ratio

(RRR), a measure to help smaller-scale lenders, covering 95% of commercial

banks, was launched on Thursday and was expected to release CNY300-380 billion.

     In addition, traders expect the Contingent Reserve Allowance (CRA), a

temporary tool created to boost year-end liquidity, to add CNY300 billion.

     --GENEROUS 'MOTHER CENTRAL BANK'

     "Mother Central Bank was so surprisingly generous" that it was almost

overdoing it, relative to the stated purpose of liquidity, said a trader with a

large private bank in Shanghai. The PBOC called its multiple injections a

"hedge" to meet taxation- and holiday-related cash demand. 

"The market could have easily viewed it as conflicting with the continuity of

its policy," he said.

     The sufficient liquidity reduced volatility of market rates. The

volume-weighted average rate of the benchmark 7-day repo traded in the interbank

market, an indicator of overall liquidity, jumped to 2.9376% on Jan 11 from

2.26860% on Jan 5. That was a difference of 25.08 basis points, compared with a

divergence of 32.88 points in December. The rate on Jan 18 rate was the lowest

since April 14, 2015.

     Fewer traders see room for the 7-day repo to rise, with just one in five

respondents seeing an increase over the next two weeks ahead of the holiday.

That's down from 73.68% in the previous survey and the lowest since August.

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

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

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

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