MNI China Daily Summary: Friday, August 21

EXCLUSIVE: China's unbalanced economic recovery is facing a drag from sluggish domestic demand even as factory output rebounds, limiting 2020 growth to about 2.5% and raising questions about the sustainability of any new expansionary phase, policy advisors told MNI. Retail and private investment will not properly recover before the Covid-19 pandemic ends, said Zhu Baoliang, chief economist at China's State Information Center under the National Development and Reform Commission. Gross domestic product could expand by 5% in the third quarter, and by 6% in the fourth, he said.

EXCLUSIVE: China will accelerate infrastructure spending in the second half of the year in a bid to boost economic growth, targeting projects ready to start at short notice and able to generate viable revenue streams, government advisors told MNI. Infrastructure activity should pick up once the rainy season ends, taking annual growth in the category to 10% and helping "to secure at least 3% GDP growth," said Zhang Yiqun, director of a fiscal studies institute affiliated with Jilin province's finance department. Up until the end of July, investment in infrastructure has run slightly below 2019's level, but many projects planned for 2020 did not get underway until May or June, despite large-scale issuance of infrastructure-backed special-purpose bonds throughout the first half, he said.

POLICY: China should set a GDP growth target of around 3% for this year and leave enough policy room for the future as the pandemic still offers great uncertainty before a vaccine is successfully developed, according to Justin Yifu Lin, a prominent economic policy advisor and former chief economist at World Bank. Employment growth and economic growth are highly correlated, and growth of 3% can help the government meet its goal of poverty alleviation, Lin said in a speech, adding that China's potential economic growth rate is 8%, Beijing News reports.

POLICY: A weakening U.S. dollar is likely to further boost demand for gold and drive capital to Asian economies including China, wrote Sun Chao, a researcher at the International Monetary Institute of Renmin University in an article in the China Daily. Sun said that gold may still be in the early stage of an uptrend, despite the price tumbling 4.7% to $1,932.28 on Tuesday, after a multi-week rally saw it hit a fresh record high above $2,000 per ounce.

LIQUIDITY: The People's Bank of China (PBOC) injected CNY150 billion via 7-day reverse repos and CNY50 billion via 14-day reverse repos with the rates unchanged. This resulted in a net injection of CNY50 billion given the maturity of CNY150 billion of reverse repos, according to Wind Information. The treasury conducted CNY50 billion of cash deposits at commercial banks on the same day, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) rose to 2.3240% from Thursday's close of 2.2772%, Wind Information showed. The overnight repo average increased to 2.2559% from 2.1919% on Thursday.

YUAN: The currency strengthened to 6.9136 against the dollar from Thursday's close of 6.9216. PBOC set the dollar-yuan central parity rate lower at 6.9107, compared with Thursday's 6.9274.

BONDS: The yield on 10-year China Government Bonds was last at 2.9800%, down from Thursday's close of 2.9950, according to Wind Information.

STOCKS: The Shanghai Composite Index rose 0.50% to 3,380.68, while the CSI300 index gained 0.85% to 4,718.84. Hong Kong's Hang Seng Index rallied 1.30% to 25,113.84.

FROM THE PRESS: The spread between China's 1-year LPR and 1-year MLF is expected to narrow, driving down LPR quotations even as the MLF interest rate remains unchanged, the Economic Information Daily reported citing Wang Qing, chief analyst at Golden Credit Rating. Even if the MLF rate is lowered, the range will be significantly lower than that in the first half of the year, Wang told the Daily. The PBOC is still expected to increase lending support for private and small companies and manufacturers in H2, even as the central bank left LPR unchanged for four months, the newspaper said citing analysts.

China is likely to further tighten regulations on real estate financing for developers, particularly in cities with increasing home prices, the China Securities Journal reported citing analysts. Restrictions on financing can help curb expansion by developers and prevent accumulating debt risks, the Journal's report said. With a total of CNY253.6 billion in real estate bonds set to mature from August to December, developers' short term cash flows will come under pressure if more financing restrictions apply, the newspaper said citing Yang Yewei, analyst at Guosheng Securities.

China needs to push for more structural reforms such as lowering taxes for middle-income earners, reforming value-added taxes, and building its digital economy, according to an article in the People's Daily by Peng Wensheng, the chief economist at China International Capital Corp. Writing in the Daily on Friday, Peng said these reforms would successfully boost internal demand, counter a weakened global economy and build China's so-called "internal circulation," or internal market driven model. China should shun short-term stimulus such as a housing boom which could create potential instability in the future, Peng said.