REPEAT: MNI SOURCES: PBOC May Slow Pace Of Liquidity Easing

Repeats Story Initially Transmitted at 06:50 GMT Aug 23/02:50 EST Aug 23

--Rising Concerns For Inflation Pickup And Economic Slowdown: Source

--Deleveraging Regulations, Although Relaxed, Still Bite: Source 

--Interbank Market May Feel Tighter Liquidity Soon: Source

     BEIJING (MNI) - Room for the People's Bank of China to further loosen

monetary policy appears limited as inflationary pressures pick up, the yuan

weakens and the deleveraging campaign continues, MNI understands from talks with

people familiar with PBOC operations.

     Additionally, the sources note, the current easing policy has not yet

produced the expected results, as liquidity has yet to reach its intended

target.

     "The market will not see the extreme liquidity easing enjoyed in early

August," a source close to the central bank told MNI. 

     "The PBOC's intention in loosening liquidity was to guide banks to expand

credit, boost the economy and smooth corporate bond default risks. But the

reluctance of banks to lend, locking liquidity inside the interbank market, has

obviously been contrary to policy purposes," the source said.

     Concerns that inflation may pick up, together with the economy's poor

performance, has fuelled expectations of 'quasi stagflation', seen as one of the

main reasons to explain the recent bearishness across bond and stock markets.

     "Although CPI will remain below the target (3% year-on-year growth) we set

early this year, the rising momentum needs to be watched, particularly if the

pace picks up," the source warned, noting that currently inflation sits within

an appropriate range for the central bank.

     --'STAGFLATION' CONCERNS

     After three months below 2%, CPI unexpectedly rebounded to 2.1% y/y in July

on higher food prices, particularly pork. Service prices, including rising house

rents in Tier 1 cities, are also expected to increase. Imports prices are also

expected to edge higher on the back of the weaker yuan and the U.S. tariffs.

     "What is more, the government's dependence on infrastructure investment to

boost the economy will drag up PPI, which will eventually pass through to CPI,"

a second source told MNI.

     Inflation concerns, together with pessimism on the economy as domestic

demand, investments, exports and consumption all slow, has weighed on financial

assets.

     So far this month, the 10-year CGB yield is 15.5 bps higher at 3.63%, while

the Shanghai CS300 is down 5.62%. 

     --TIGHTER MARKETS

     Zhu Hexin, the newly-appointed vice governor of the PBOC, said Tuesday that

the central bank will maintain a policy of "reasonable and adequate" liquidity,

but will not set the floodgate wide open.

     Given the PBOC's liquidity provision since July, the benchmark seven-day

repo fell to 2.2480% on August 8, below the 2.55% policy rate for the same

duration.

     The PBOC skipped open market operations for 19 consecutive trading days

from late July. The long suspension of OMOs, along with the mid-August tax

payments, has pressured liquidity, pushing the seven-day repo rate back to

2.6632% by Tuesday.

     "As long as the PBOC stops injections, the market will feel tight,

particularly when banks are big buyers of big newly-issued government bonds,"

the second source said. "The deleveraging campaign is expected to be on-going,

which could target local government vehicles, so lenders are quite cautious," he

said.

     Ministry of Finance data shows the average monthly issuance of government

bonds, including CGB and LGB, was CNY266 billion for the first half of the year,

but surged to CNY860 billion in July and stands at CNY600 billion in the first

half of August.

--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