MNI Liquidity Survey: PBOC Remains Generous to Soothe Market

--Benchmark Seven-day Repo Rate To Stay Low On Continued Ample Liquidity

--Yields of 10-Year CGB To Fall On Easing Policy And Soft Economy

--Credit Expansion To Private Sector Needs Time To Work

     BEIJING (MNI) - China's central bank retained an ample liquidity stance

this month as stock and forex markets suffered levels of volatility hardly seen

in years.

     The latest MNI China Interbank Liquidity Survey shows the percentage of

traders seeing liquidity conditions as improved rising to 46.7%, up from 44.4%

last month, and no participants said liquidity has been tight, in the second

zero reading for deteriorating conditions this year.

     The survey gauged the opinions of 15 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 financial institutions. Interviews were conducted from Oct 26 to Oct

30.

     "The 'neutral tilting to easing' stance of the PBOC has been quite obvious,

under pressure from domestic and external uncertainties," a Shanghai trader with

one of the big state-owned commercial banks told MNI, adding that the stance was

unlikely to shift this year as the central bank acts to soothe market sentiment

and support the weakening economy.

     --CONTINUOUS EASING

     The central bank implemented its fourth cut in the reserve requirement

ratio this year on Oct 15, by 100 bps, unlocking a net of CNY750 billion into

the interbank market.

     The PBOC also added a net CNY460 billion through open-market operations

last week, the fifth-biggest weekly injection this year. It followed a two-week

withdrawal totalling CNY300 billion.

     No survey respondents thought monetary policy was being conducted with a

tightening bias. It was the fourth month in five that the survey has shown a

zero balance since June, with the only exception coming in August, when 5.6%

were looking for tightening.

     "The keynote of monetary policy this year remains ample liquidity, which is

the precondition for credit expansion to support the real economy," a trader at

a commercial bank in the middle of the country said.

     A majority of participants, eight out of 15, now see the seven-day repo

remaining at the current low level over the next two weeks. That was up from 50%

in the previous survey. The volume-weighted average rate of the benchmark

seven-day repo traded in the interbank market averaged 2.5896% this month, about

10bps higher than 2.6494% in August.

     --ECONOMIC OUTLOOK

     Traders' economic outlook is still bleak. Of the 15 traders, 13 said

current economic conditions have deteriorated, compared with only one who said

that in the same period last year.

     "Recent economic indicators have showed the economy is getting worse," said

a trader with a commercial bank in eastern China, "Industrial profits are

sliding and the producer price index is also softening," he noted.

     The PBOC has striven to further expand credit to the private sector,

including adding another CNY150 billion of targeted relending and rediscounting

and the launch of a new credit support tool which is expected to help issue as

much as CNY160 billion in new bonds. However, the outcome is expected to be

limited at least in the short term.

     "The policy makers do not want to follow the old pattern (stimulating the

economy via loose policy), but a new pattern has not been found yet," a Shanghai

trader in a commercial bank said, "The external environment is bad, plus the

sluggish economic growth is being dragged down by the deleveraging campaign. It

(monetary policy transmission) would be a long-term thing."

     Some 46.7% of respondents said they see the yield on 10-year government

bonds (CGB) moving lower over the next three months, the highest percentage

since the survey in June and up from 26.3% in last October's poll.

--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 London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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