MNI China Daily Summary: Friday, Aug 10

     TOP NEWS: China's interbank markets feasted on extreme liquidity conditions

in July, at levels unseen since 2016, as the central bank kept the floodgates

open, according to a survey by MNI. "We are drowning in liquidity," said a

Shanghai-based trader with a major state bank. Although the PBOC has tried to

drain liquidity by skipping daily open market operations (OMOs), the large

injection seen in July far exceeded demand.

     TOP NEWS: China's factory gate inflation was subdued in July and consumer

inflation remains well within the government's target, reflecting the limited

initial impact of both the trade war and the weakening yuan on prices. 

     LIQUIDITY: The PBOC skipped OMO on Friday, citing that a relatively high

level of liquidity can offset the impacts of government bonds issuance and tax

payments. No reverse repos mature today, according to the PBOC. The PBOC has not

conducted OMOs for 16 consecutive days. No liquidity has been injected or

drained this week. CFETS-ICAP's money-market sentiment index closed at 38 on

Thursday, significantly up from 33 on Wednesday.

     MONEY MARKET RATES: Benchmark 7-day deposit repo average fell to 2.3092% on

Friday from 2.3412% on Thursday; overnight average increased to 1.8170% from

1.6217% on Thursday: Wind Information.

     YUAN: The yuan weakened to 6.8355 against the U.S. dollar on Friday from

Thursday's 6.8233 closing, following today's weaker fixing. The PBOC set the

yuan central parity rate at 6.8395, weaker than Thursday's 6.8317. The central

bank has set the fixing weaker for three trading days out of five this week.

USDCNH is clinging to yesterday's late gains, currently trading at 6.8582 as the

bullish trend threatens to resume. 

     YUAN: HSBC's year-end forecast for USD/RMB is RMB6.70, with the bank

"taking into account the mildly negative impact that currently imposed trade

tariffs would have on China's growth and yield advantage, as well as the PBOC's

likely measures to 'lean against the wind'. However, the risk of an even weaker

RMB exists, considering the US's latest proposal to impose punitive tariffs (be

it 10% or 25%) on an additional USD200bn of imports from China."

     BONDS: The yield on benchmark 10-year China Government Bond was last at

3.5500%, remaining unchanged from the previous close, according to Wind

Information.

     STOCKS: Shanghai Composite Index closed 0.03% higher at 2,795.31.

Agriculture shares led the gain after three major crops were added to the list

of agricultural insurance subsidies yesterday. Hong Kong's Hang Seng Index

declined 0.91% to 28,347.48.

     FROM THE PRESS: Social financing and on-balance-sheet credit growth are

expected to rise in the second half of the year, as the major banks have

increased reserves and boosted loan grants, China Securities Journal reported,

citing an unidentified branch official of a major state-owned bank.

Infrastructure, small- and micro-sized enterprises and high-tech manufacturing

will be the focuses of loan investment, the newspaper said, citing the same

official. Banks will likely see one or two more required reserve ratio cuts

within the year, which will boost credit funds, enhance the degree of

independence in lending and strengthen support for targeted industries, the

newspaper said, citing institutions including Citic Securities.

     Interbank liquidity has been excessively loose, as indicated by the

inversion of the yield on benchmark 1-year China Government Bond and the rate of

OMO, Economic Information Daily reported. Although local bonds issuance and tax

payments can partly drain liquidity, the excess reserve ratio may be above 2%

after the PBOC has skipped OMOs for 15 days, the newspaper said, citing Haitong

Securities. Large amounts of funds cannot flow into the real economy, stuck in

the interbank market, the newspaper said, citing market participants. The PBOC

may use repos and other monetary policy tools to drain some liquidity to

stabilise the market, said Citic Securities, according to the newspaper.

     Industrial and Commercial Bank of China and Agriculture Bank of China have

both increased the mortgage rate discount from 5% to 10% for first-time home

buyers in Shanghai, 21st Century Business Herald reported. The mortgage rate for

a second house remains unchanged, at 10% higher than the benchmark interest

rate, the newspaper said. China Construction Bank and Bank of China have also

maintained a mortgage rate discount of 10%, according to the newspaper. Shanghai

is currently the only first-tier city that has a mortgage rate discount for

first-time home buyers in China, the newspaper added.

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

--MNI Beijing Bureau; +86-10-8532-5998; email: beijing@marketnews.com

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