MNI Liquidity Survey: PBOC Slows Leveraging With Lqdty Squeeze

--Fewer Survey Participants Think PBOC Imposed A Tighter Bias 

--Majority of Traders Sees Economy As Same or Worse Than Previous Month

--More Traders Expect 7-day Repo Rate to Fall Over Next Two Weeks

     BEIJING (MNI) - Tighter liquidity conditions across money markets is the

stand out feature from MNI's latest monthly China Interbank Survey, which gauged

the opinions of 19 traders from financial institutions operating in China's

interbank market, the economy's main source of financing.

     The latest survey, conducted between April 23 to April 27, shows 73.7% of

respondents believe liquidity conditions have deteriorated, the highest number

since November 2017. That's up from 10% in March and 68.4% in April last year.

The percentage hadn't previously been over 50 this year.

     The PBOC has been parsimonious with its cash since the middle of April and

the April 25 Reserve Requirement Ratio reduction, has not helped sate a thirsty

market.

     However, fewer survey participants think the PBOC imposed a tighter bias in

its monetary policy. Only one out of the 19 traders noted the tighter bias, the

second lowest level since Sep. 2016 , with only last March ahead.

     --PESSIMISTIC OUTLOOK

     March economic data were weaker than expected across the board -- from the

PMI to new loans and investment -- and pessimism about the economic outlook is

pervasive, with 18 of the 19 traders surveyed seeing economic conditions as the

same or worse than the previous month.

     "The market is overly pessimistic about the economy," said a Beijing-based

trader who works for a commercial bank and the only respondent of 19 to say that

economic conditions are improving, "China's economy is under transition. The

investment in hi-tech sector will set off the influence of weak exports and

infrastructure investment," he said.

     Even with the current liquidity tightening, the majority of traders

surveyed, 73.7%, expect the seven-day repo rate to fall over the next two weeks,

the highest percentage since MNI started the survey in May, 2014. That's partly

because the PBOC has introduced the RRR cut.

     Indeed, the seven-day repo rate fell to 2.9455% on Wednesday from 3.0269%

on Friday.

     Government bond yields have tumbled as much as 40 bps this year, as

disappointing economic data boosted expectations among some investors for

monetary easing. After the PBOC announced the RRR cut, 10-year CGB yields fell

to 3.5013% on April 18 from 3.6512% the previous day.

     --NO MAJORITY FOR BOND RALLY

     A total 26.3% of traders in the Market News survey expect the yield on the

10-year government bond to be lower in three months' time, the joint highest

since June, 2017 (matches Oct 2017).

     Even so, the number of traders who see scope for yields on 10-year

government bond yields to rise or remain unchanged are still the majority.

     The survey also saw 13 out of 18 traders, or 72.2%, predict the PBOC will

continue to hike its OMO rates this year. On March 22, the PBOC raised its OMO

rates by 5 bps following the Federal Reserve rate hike.

     However, 10 out of 15 traders, or 66.7%, expect benchmark interest rates to

remain unchanged or fall this year on economic downturn concerns.

     The survey result marks changed expectations in the market.

     Over the last year, it has been expected that the PBOC may hike benchmark

rates to enforce the deleveraging move, narrowing the gap between real market

rates and benchmark rates in the process of rate liberalization. However, the

authorities' recent emphasis on economic stability has seen rate hike

expectation fade, with some trader predictions of rates cuts starting to

emerging.

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

--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

[TOPICS: M$A$$$,M$Q$$$,MC$$$$,MT$$$$,MX$$$$,MN$MM$]