MNI China Daily Summary: Friday, August 24

     TOP NEWS: Room for the People's Bank of China (PBOC) to further loosen

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

weakens and the deleveraging campaign continues, MNI understands from people

familiar with PBOC operations. Current easing policy has not yet produced the

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

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

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

     TOP NEWS: China and the U.S. had "constructive and honest" talks on trade

matters, with communication lines set to be kept open and active, according to

China's Ministry of Commerce on Friday.

     YUAN: The yuan eased to 6.8782 against the U.S. dollar from Thursday's

closing of 6.8690. The PBOC set the yuan central parity rate at 6.8710 on

Friday, sharply lower than Thursday's 6.8367, in the biggest daily drop since

Aug 3.

     LIQUIDITY: The PBOC injected CNY149 billion through 1-year Medium-Term

Lending Facilities (MLF) loans on Friday, with the rate unchanged at 3.3%. The

move aims to offset the impact of government bond issuance and reverse repo

maturities, according to a PBOC statement. As CNY90 billion in reverse repo

matured today, the PBOC's net injection amounted to CNY59 billion. CFETS-ICAP's

money-market sentiment index closed at 32 on Thursday, up from 31 on Wednesday.

     POLICY: Chinese swap rates recovered some of yesterday's losses, holding

above August 16 lows across the curve. The 2-year traded at 2.8650% as of 13:13

pm Beijing time, up 1.5bps on the day. Yesterday's renewed rise in US 2-year

yields is another factor adding upside pressure to rates. While U.S. and Chinese

swaps have traded with a strong inverse correlation so far this year, the PBOC

appears increasingly keen to avoid interest rate spreads with the US widening

further, and so any further US hikes should put upside pressure on Beijing.

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

2.5777% on Friday from 2.6113% on Thursday; the overnight average decreased to

2.3729% from 2.4193%: Wind Information.

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

3.6300%, up from the previous close of 3.5900%, according to Wind Information.

     STOCKS: The Shanghai Composite Index closed 0.18% higher at 2729.43 on

Friday. Hong Kong's Hang Seng Index dropped by 0.43% to 27,671.87.

     FROM THE PRESS: Chinese authorities will further reduce restrictions on

foreign investment in financial institutions, the China Securities Journal

reported, citing Zeng Gang, deputy director of the National Institution for

Finance and Development. On Thursday, China's banking regulator announced it

would lift shareholding restrictions for foreign investment in Chinese banks and

asset management companies. The authorities are also working on enhancing risk

controls, with European and Japanese investors recently showing more interest in

China as a result, the Journal noted, citing an official from the CBIRC.

     Chinese banks are increasing purchases of local government bonds on the

back of more favourable policies enacted by the authorities, the 21st Century

Business Herald reported. Rapid declines in LGFV bond yields, as well as local

government bond tax exemptions and more favourable coupon rates have contributed

to boosting banks' buying. However, recent rumours the Chinese government may

lower the risk weighting on local government debt from 20% to 0% would be

difficult to put into place, the newspaper said, citing analysts and bankers who

say that such action would go against global standards, including Basel-III.

     Various central and local government initiatives suggest that China is

closer to establishing a property tax, the Securities Daily reported. In

mid-August, the State Council issued a document that requires cities and

provinces to implement comprehensive property registers. The establishment of an

online centralised database also suggests that preparations for implementing a

property tax are being made, the newspaper said, citing Zhang Yiqun, director of

the Jilin Province Chinese Academy of Fiscal Sciences.

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

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