MNI China Daily Summary: Friday, August 30

     EXCLUSIVE: The widening spread between the People's Bank of China (PBOC)'s

daily yuan rate and the currency's spot value is in danger of undermining the

guiding role of the central bank reference price, damaging its ability to

restrain further depreciation, although the authorities are likely to try to

keep the fixing stable for the near future, Chinese policy advisors told MNI.

The deviation between the USDCNY highest spot price and the fixing was at least

1.2% on each of the past four trading days, its longest period above 1% since

Aug. 11, 2015, when the PBOC shocked markets by lowering the reference price by

1.87% against the dollar. While this deviation remains within the PBOC's

tolerance band of 2%, a government advisor told MNI that if it did not narrow,

the role of the fixing price as a market guide will weaken.

     LIQUIDITY: The PBOC skipped open market operations (OMOs). This resulted in

a net drain of CNY80 billion given the same amount of reverse repos matured,

according to Wind Information. The increased fiscal spending by month-end

offsets the issuance of local government bonds and the maturity of reverse

repos, keeping the liquidity in the banking system reasonable and ample, the

PBOC said.

     RATES: The 7-day weighted average interbank repo rate for depository

institutions (DR007) fell to 2.6690% from Thursday's close of 2.6712%, Wind

Information showed. The overnight repo average rose to 2.5734% from Thursday's

2.4588%. 

     YUAN: The yuan closed at 7.1452 against the dollar from Thursday's close of

7.1514. The PBOC set the dollar-yuan central parity rate higher at 7.0879,

compared with 7.0858 on Thursday.

     BONDS: The yield on 10-year China Government Bonds was last at 3.0550%, up

from the close of 3.0325% on Thursday, according to Wind Information. 

     STOCKS: The Shanghai Composite Index decreased 0.16% to 2,886.24. Hong

Kong's Hang Seng Index edged up 0.08% to 25,724.73. 

     FROM THE PRESS: Moves to order American companies to leave China would

decouple the Chinese and U.S. economies and endanger the global supply chain and

international trade, Xinhua News Agency said in a commentary. Such moves were

contrary to the laws of the market economy and the trend towards globalization,

and would sacrifice the interest of American companies, Xinhua said.

     China's bond market is disturbed by rumours suggesting that regulators

could include policy bank bonds in interbank investment management and limit the

size of interbank assets, said Ming Ming, chief analyst at CITIC Securities in a

report. Ming said such rumours have led to the weakening of policy bank bonds

while strengthening government bonds. He said policymakers could be aiming to

curb the disorderly expansion of the interbank assets of some small and

medium-sized banks, rather than targeting policy banks. Increased interbank

regulations and the marginal tightening of credits would be conducive to drive

down risk-free interest rates, Ming said.

     Foreign investors are buying more policy bank bonds than Chinese Government

Bonds (CGBs) in July and the purchasing power of foreign capital has become an

important influence on interest rate bonds, Securities Times reported. Overseas

institutions bought CNY62 billion of yuan bonds, among which policy bank bonds

accounted for 62%, compared to a proportion of 11% for CGBs, the newspaper said.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]