MNI Survey: PBOC Injections Cheer China Interbank Traders

     BEIJING (MNI) - The People's Bank of China gave the country's interbank

market plenty to cheer about this month as it offered lashings of liquidity to

keep monetary conditions and interest rates stable in the run-up to a key

meeting of the ruling Communist Party that opened on Oct. 18.

     Sentiment continued to recover from a gloomy summer as the central bank

pumped money into the financial system even as it warned markets that there

would be no let-up in its determination to force the financial sector to

deleverage after announcing a cut in banks' reserve requirement ratio on Sept.

30 that would become effective on Jan. 1, 2018.

     The Communist Party's obsession with stability, especially ahead of

important national meetings, meant that financial regulators, government

ministries, and local government were all under orders to ensure not the

slightest tremor of volatility or stress before and during the 19th Party

Congress. Congresses are held every five years and this year's gathering was Xi

Jinping's opportunity to consolidate his power as general secretary of the party

and install his allies in key party positions.

     As a result, the PBOC was in the mood to be generous, to an extent that

exceeded the expectations of a market primed for bad news. The latest Market

News International monthly interbank survey showed a record number of traders -

89.5% percent of respondents - reporting improved liquidity conditions. The

number surged from 26.3% in September, the biggest jump since the survey began

in May 2014, and was up from zero in both July and August. No traders said

liquidity conditions were worse for the first time since February 2016, down

from 42% in September's survey and 95% in August.

     The MNI survey gauged the opinions of 19 traders with financial

institutions operating in the interbank market, the country's main platform for

trading money-market, bond and currency instruments, and the main funding source

for financial institutions. Interviews were conducted from October 16 to 18.

     "Liquidity conditions have eased up a lot, something I haven't seen for a

long time," said a Shanghai-based trader with a small regional bank. "Not only

have we had the PBOC injecting money, you can see that demand is really going

down as the deleveraging campaign has started to bite."

     Data from financial regulators show that outstanding interbank assets and

liabilities fell at the end of June from the start of the year and have

continued to shrink. Growth in wealth management products (WMP) has also slowed,

with the balance of interbank WMP falling by CNY2.2 trillion from January to

August 2017.

     Traditionally, the first month of a new quarter is a time of tightening

liquidity. The PBOC sucks out money injected the previous month to tide markets

over what can sometimes be a rocky period when banks, the main providers of

funding to the interbank market, hoard cash to meet quarter-end regulatory

requirements.

     In the two weeks since financial markets reopened after a nine-day public

holiday that ended on Oct. 9, including Monday, the PBOC has made a total net

injection of CNY480 billion through open-market operations and a net CNY58.5

billion addition via loans to selected banks through its Medium-term Lending

Facility (MLF). 

     "The liquidity environment has been very comfortable recently, particularly

for short-term funds," said a Beijing-based trader with a state-owned bank. "The

PBOC has been injecting funds and the big banks have been generous in providing

liquidity too."

     But traders recognize that the central bank's generosity is linked with the

Party Congress.

     "It's all to do with maintaining stability for the 19th Party Congress,'

said the Beijing-based trader. "I don't think this situation is going to last

much longer."

     Referring to the PBOC by its nickname, another trader with a small bank in

eastern China said, "Central bank mother just wants us to relax and watch the

19th Party Congress. Things are going to change when it's over."

     The Party Congress is due to end on Tuesday, Oct. 24. 

     Along with a return to tighter liquidity conditions, traders in the MNI

survey are expecting money to become more expensive as the deleveraging campaign

continues. The PBOC has pushed interest rates in the interbank market higher

this year to make it more costly for financial institutions to borrow cheaper

short-term money and shift it into higher-yielding longer-term investments.

     The benchmark seven-day deposit repo rate, which reflects the cost of

borrowing for banks, has crept up from 2.3% at the beginning of the year,

spiking to over 3.1% before the October public holiday and is currently trading

between 2.8% and 2.9%. Over the same period, the seven-day repo rate, which

reflects the cost of borrowing for all financial institutions and is much more

volatile, has risen from 2.4% and was last trading at around 3.2%, although it

has jumped above 4% several times during the year.

     Almost three quarters of the traders in the MNI survey said they see

seven-day repo rates moving higher over the next two weeks, the highest

percentage since March. For the first time since the December 2016 survey, no

traders said they expect rates to decline.

     "Liquidity is going to get tighter after the congress," said a trader with

a city commercial bank in eastern China. "Rates on seven-day and 14-day repos

are rising, which indicates institutions are starting to hoard capital because

they expect tighter liquidity in the latter part of the month."

     Traders are more optimistic about the economy than they've been since

April, with 13 of the 19 respondents saying economic conditions have improved,

and only one trader saying conditions are worse, the lowest since March. The

improved sentiment helped give a shot in the arm to government bond yields.

     PBOC Governor Zhou Xiaochuan jolted financial markets last week with

comments made in Washington that the country's economy could grow by as much as

7% in the second half of the year, defying expectations for a marginal slowdown

from the 6.9% year-on-year pace seen in the first half of the year. Zhou's

positive outlook raised the specter of higher interest rates and pushed the

yield on 10-year government bonds above 3.7% for the first time since April

2015. The yield on the most-actively traded 10-year CGB jumped as high as

3.7450% on Wednesday, the day before the release of third-quarter GDP data.

     In the event, Zhou was slightly optimistic, with third quarter growth

coming in bang in line with the market consensus for 6.8%. Nevertheless, markets

continue to expect higher interest rates - survey respondents who see 10-year

CGB yields rising have outnumbered those who predict a decline since November

last year.

     "The rising yields on 10-year government bonds indicate that the market is

optimistic about the economic situation," said the Shanghai-based trader with

the small regional bank, who predicted yields could rise to around 4.1%.

     "I am quite positive about the economy - consumption and trade aren't bad,

prices are rising due to supply-side reform, and industrial profits are

increasing," said the trader with a city commercial bank in eastern China.

"Although property and infrastructure investment growth is weaker, that's due to

government policy and is under the control of the government."

     But there are contrarians. "Downward pressure on the economy is still

significant," said the trader with a small bank in eastern China. "The data has

been manipulated, but it's having a big influence on the market. There's a tug

of war going on between market expectations and the economic data and I think

that's going to make the bond market more volatile."

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

--MNI Beijing Bureau; +44 203-586-2244; email: nerys.avery@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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