MNI China Daily Summary: Friday, August 17

     TOP NEWS: China's economy has started to level out, entering a period of

moderate growth, but it won't see a V-shape or U-shape rebound as the

development model based on high investment, particularly in infrastructure,

property and exports, has changed, Liu Shijin, a member of the PBOC's Monetary

Policy Committee, told MNI. It is not impossible for growth to rise to 7% if

some sharp stimulus measures were taken, but it would only have a short-term

effect and would have side effects, the advisor to the central government

warned. "China just needs to maintain GDP growth of 6.3% before 2020 to meet our

target, while 5% to 6% growth will be good enough after that," he said. Under

the current tax system with pressure on the fiscal deficit, the room for further

tax reduction is quite limited, he said.

     LIQUIDITY: The People's Bank of China injected CNY90 billion via its 7-day

reverse repos on Friday, resulting in a net injection of CNY90 billion as no

reverse repos matured today. The PBOC has injected a total of CNY513 billion via

reverse repos and medium-term lending facilities (MLF) loans this week. The

CFETS-ICAP's money-market sentiment index closed at 42 on Thursday, up from 36

on Wednesday. The benchmark 7-day deposit repo average rose to 2.6428% on Friday

from 2.5760% on Thursday: Wind Information.

     MONEY MARKET RATES: The benchmark 7-day deposit repo average rose to

2.6467% on Friday from 2.5760% on Thursday; the overnight average increased to

2.5782% from 2.5054% on Thursday: Wind Information.

     YUAN: The yuan strengthened to 6.8882 against the U.S. dollar on Friday

from yesterday's 6.8960 closing, following today's stronger fixing. The PBOC set

the yuan central parity rate at 6.8894. This is the first time the central bank

has set the fixing stronger after setting it weaker for six trading days in a

row.

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

3.6550%, up from the previous close of 3.6150%, according to Wind Information.

     STOCKS: Shares in Shanghai continued to slip. The Shanghai Composite Index

closed 1.34% lower at 2,668.97, weighed down by the medicine sector after the

government sacked several high-ranking officials over a vaccine scandal in the

north-eastern province of Jilin. Hong Kong's Hang Seng Index rose by 0.20% to

27,154.19.

     FROM THE PRESS: The Shanghai branch of the People's Bank of China has

banned banks in the Shanghai Free Trade Zone from depositing or lending yuan

offshore through interbank accounts, China Securities Journal reported, citing

an unidentified person close to the PBOC. This ban will not affect cross-border

capital flows that reflect real demand, the newspaper added. The move is aimed

at tightening offshore yuan liquidity and making it more expensive to short the

Chinese currency, the newspaper said, citing an anonymous market analyst. This

notice sends a clear signal that the PBOC is preventing capital outflow and is

stabilising the yuan's fluctuations, the analyst said, according to the

newspaper.

     The yuan is not likely to rebound as it did in the fourth quarter of 2016,

China Securities Journal reported, after onshore yuan slipped below 6.9

yesterday. The surge of the U.S. dollar has been supported by the U.S's strong

economic fundamentals, higher interest rate, and its efforts to lower its trade

deficit, the newspaper said. The yuan, having seen both appreciation and

depreciation this year, has appropriately reflected both internal and external

pressures and has enhanced its flexibility, said Xie Yaxuan, chief economist of

Merchants Securities, according to the newspaper. The PBOC may soon implement

counter-cyclical measures to stabilise the forex market once the yuan reaches

the 7.0 level, the newspaper said, citing market participants.

     China will substantially support private capital investments to stabilise

investment and boost the vitality of China's economy, the State Council said at

its executive meeting yesterday, according to Shanghai Securities News. China

will significantly lower the bar for private capital to enter key industries,

including railway, telecommunications and civil aviation, to expand domestic

demand and improve employment, the newspaper said. China will further cut taxes

and fees to lower financing costs of private enterprises and enhance the

transmission mechanism to serve the real economy, the newspaper added.

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

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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