MNI: Surplus Liquidity Slams China Overnight Repo Rate Lower

--Overnight Repo Rate Falls 42 Bps, Biggest Drop In Four Years

     BEIJING (MNI) - China's interbank market rates fell sharply Friday, weighed

by an abundance of surplus funds as recent cash drains on the system start to

dissipate, traders and analysts told MNI.

     "As demand for liquidity for tax payments and China Spring Festival has

reduced, and the injection from fiscal spending, the interbank market has

adequate liquidity," Ming Ming, the chief fixed-income analyst of CITIC

Securities, the country's biggest brokerage, said.

     "Since the money market rates are lower than their relevant policy rates,

the central bank could consider cutting policy rates as early as the second

quarter when the economy is expected to face headwinds and the Federal Reserves

may suspend rate hikes," said Ming, a former official in the Monetary Policy

Division at the People's Bank of China.

     One city commercial bank trader told MNI that the liquidity is building

following the injection from fiscal spending last week. The trader, who

reflected tighter conditions in MNI's latest liquidity survey, said "the flow of

cash into stock market is also slowing."

     The volume-weighted average overnight repo rate fell 41.7 basis points to

2.15% in the morning session, the biggest daily drop since 2014, according to

Wind Information, while the benchmark 7-day repo, considered the best indicator

of general liquidity, fell 22.6 bps to 2.41% and lower than its aligned policy

rates, currently at 2.55%.

     --BACKDROP

     For March, the situation will largely remain stable as the 'two sessions',

the annual gathering of political leaders and policymakers, are scheduled for

next two weeks and need a benign backdrop, another trader told MNI, "But there

will be some turbulence at the month end as the quarterly assessment impacts,"

he said.

     Traders and analysts are concerned that a dearth of adequate collateral

could keep liquidity inside the system, weighing on rates for some time yet.

     Ming said an asset shortage appeared in the second half of last year as the

property market was strictly curbed by regulators and the increased issuance of

local government bonds can't meet investment demand.

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

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

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