MNI LIQUIDITY SURVEY: PBOC Floodgates Open; Econ Pessimism Up

--Survey: "Extremely Ample" Liquidity in China Interbank Market 

--Survey: Most See PBOC Benchmark Rates Unchanged

--Growing Doubts on China Economy Despite Looser Liquidity

--China 7-Day Repo Rate Seen Dropping Ahead Month-End

     BEIJING (MNI) - China's interbank markets feasted on extreme liquidity

conditions in July, at levels unseen since 2016, as the central bank kept the

floodgate open, according to a survey by MNI.

     The People's Bank of China (PBOC) pumped out money following the release of

Q2 GDP data, which showed growth softened to 6.7% from 6.8% in Q1, weighed by

sluggish investment and consumption, followed by the Communist Party's

politburo, the country's top decision-making body, saying on Jul 23 that

liquidity should remain "reasonable and adequate".

     "We are drowning in liquidity," said a Shanghai-based trader with a major

state bank in the MNI China Interbank Survey conducted Aug 1-8. Although the

PBOC has tried to drain liquidity by skipping daily open market operations

(OMOs), the large injection seen in July far exceeded demand. 

     None of the traders approached by MNI described liquidity as having

deteriorated. Such unanimity was last seen in October 2017, and compared with

5.3% in the July survey.

     The survey gauged the opinions of 19 traders with large financial

institutions in  China's interbank market, the platform for trading fixed-income

and currency instruments, and main funding source for financial institutions. 

     --RECORD INJECTION

     On July 23, the PBOC added CNY502 billion through its medium-term lending

facility (MLF), the largest single-day injection on record. Fiscal spending was

also ramped up at end-July, as policymakers urged it to be "more proactive." 

     "Thanks to the PBOC's generosity, the excess reserve ratio of lenders may

have rebounded to over 2%" from averaging over 1% through last year, said a

trader with a city commercial bank in an eastern coastal city. 

     "We no longer need to borrow from big banks or issue negotiable

certificates of deposit (NCDs) to raise fund," the trader said. 

     About CNY1.02 trillion NCDs were issued in July, compared with CNY2.2

trillion in June, according to data from Shanghai Clearing House.

     About 90% respondents described current policy bias as 'easing', the

highest since the survey began in May, 2014, up from an already elevated 84.2%

in July.

     --MONEY RATES PLUNGE

     As a result of the loosening, money market rates plunged. The

volume-weighted average rate carried on the 7-day repo dropped to 2.2490% on

Aug. 7, lower than even the 7-day policy rate of on the PBOC's OMOs at 2.55%.

The 14-day repo declined to 2.2228% on Tuesday, compared with the 2.7% policy

rate on OMOs. It was the first time that money market rates fell below policy

rates since the PBOC began to conduct daily OMOs in 2016. 

     A total 17 of 19 traders contacted projected the 7-day repo rate to decline

over the next two weeks, the highest proportion since April. On benchmark rates,

52.6% respondents didn't project cuts this year, with only 26.3% saying yes.  

     "Cutting rates would cause the yuan to depreciate even more," said a

Beijing-based trader with a joint-stock lender.

     However, many traders said repurchase agreement may be restarted to drain

excess liquidity, unable to go into the real economy given lenders' aversion to

risks, after the PBOC exhausted its reverse repos. The PBOC stopped repo

operations in November of 2014.

--PESSIMISM ABOUT ECONOMY

     Most participants are pessimistic about the economy despite the easing,

with 78.9% traders said the economy is deteriorating, the highest percentage

since September 2014, and up from 57.9% last month.

     Out of the 19 respondents, 16 believed yield on 10-year China government

bond (CGB) will trend lower or remaining at the current level over the next

three months. The yield on 10-year CGB was 3.4876% on Tuesday, compared with

3.5259% at the same period last month.

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

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