REPEAT: MNI CHINA MONEY WEEK: PBOC Liquidity Tightens

By Anthony Barton

     LONDON (MNI) - Chinese liquidity matters have come back to the fore in

recent weeks, with the PBOC skipping open market operations on no fewer than 18

days in March.

     The latest MNI China Liquidity Survey noted tighter liquidity conditions

were exacerbated by seasonal cash drains, resulting in a higher 7-Day repo rate,

which finished the week 65bp off the March low, sitting at 3.00%, although

slipping from Thursday's high of 3.40%.

     A Shanghai trader at a state-owned bank told MNI that "conditions have

tightened since mid-month as corporate tax payments and reserve requirement

ratio deposits changes scrambled liquidity. Banks are also preparing for the

PBOC's quarterly Macro-Prudential Assessment (MPA), which adds pressure on the

interbank market."

     According to some respondents to the MNI survey, the limited injections

suggest the PBOC is wary of the market holding a one-way view on liquidity

matters, although this may promote additional market volatility.

     One Chinese city commercial bank trader is a little more sanguine and told

MNI that "the 7-day repo rate will go up (this week) as the demand for

cross-quarter capital is rising, but conditions will get better after that."

     --OFFICIAL BACKING

     This point of view was amplified through comments made by Chinese premier

Li Keqiang at the Boao forum. Li stressed that China will cut "real interest

rate levels" and lower financing costs for companies.

     The latest round of weak industrial profits data (covering YTD through

February) may have some questioning the comments, with the print registering a

14.0% drop in YTD Y/Y terms, as producer price dynamics crimp companies' bottom

lines.

     Upon closer inspection, looking through the headline weakness, targeted

infrastructure investment may be doing its job with companies operating in the

non-ferrous metal mining and transportation equipment spaces.

     As long as the targeted fiscal measures continue to provide the economy

with the required support, they should offset the need for substantially looser

policy. Indeed, the week has seen various policymakers reiterate that the

country will avoid flood-like easing, while stressing that the country has

enough in its tool kit to stave off any risks to growth.

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

--MNI London Bureau; +44 203 865 380; email: anthony.barton@marketnews.com

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