MNI China Daily Summary: Friday, December 15

     TOP NEWS: The impact of the People's Bank of China's rate hikes on Thursday

will be limited and the move reflected supply and demand in the market in a bid

to guide expectations, the Financial News, a journal run by the PBOC reported

Friday, citing analysts. The interest rate spread between China and the U.S has

expanded to about 160 bps, which means the Federal Reserve rate hike will not

pressure the yuan exchange rate, the report argued. The slight PBOC rate hike

delivered a signal that deleveraging and risk prevention will continue,

indicating the PBOC will raise the rates on its liquidity instruments even when

it is not the proper time to adjust its benchmark interest rates, the report

said. The rate move is also intended to balance economic growth, the curbing of

asset bubbles and risk prevention, the report said. (Financial News)

     POLICY: The People's Bank of China issued a document Friday enabling

depository financial institutions, mainly banks, to use local government bonds

as collateral when their clearing account is short of money. When banks do not

have enough funding in their clearing account, they can automatically use

eligible bonds, including China government nd policy bank bonds as collateral to

borrow money from the PBOC to smooth clearing transactions. Now, local

government bonds and other bonds that the PBOC deems eligible can also be used

as a collateral for these transactions.

     RATES: The Ministry of Finance reopened and sold CNY28 billion in 30-year

government bonds at a yield of 4.3555% in an auction on Friday. The yield was

lower than the rate of 4.3664% that bonds with the same maturity fetched in the

secondary market on Thursday. The bonds were first auctioned on Oct. 23 with a

coupon of 4.28%.

     RATES: The Ministry of Finance sold CNY15 billion in 91-day treasury bills

at a yield of 3.9275% in an auction on Friday. The yield was lower than the

4.0210% that bonds with the same maturity fetched in the secondary market on

Thursday.

     RATES: Money market rates were mixed as medium and long-term capital demand

is increasing due to the expected cross-year tightness. The seven-day repo

average was last at 2.9132%, up from Thursday's average of 2.8998%. The

overnight repo average was at 2.6981%, much lower than Thursday's 2.8114%.

     LIQUIDITY: The People's Bank of China injected CNY80 billion in seven-day

reverse repos and CNY70 billion in 28-day reverse repos via open-market

operations. This resulted in a net injection of CNY150 billion for the day, as

no reverse repos mature on Friday. The PBOC has injected a net of CNY80 billion

via its reverse repos this week. The PBOC injected CNY288 billion into the

banking system via its Medium-term Lending Facilities (MLF) on Thursday, and a

total of CNY187 billion in MLF loans will mature on Saturday. As a result, the

PBOC will have injected a net of CNY101 billion into the banking system via its

MLF this week.

     YUAN: The yuan was stronger against the U.S. dollar on Friday despite the

People's Bank of China setting a weaker fixing rate for the day. The yuan was

last at 6.6080 against the U.S. unit after opening at 6.6084, compared with the

official closing price of 6.6088 on Thursday. The PBOC set the yuan central

parity rate at 6.6113, weaker than Thursday's 6.6033. The PBOC has set the

fixing weaker for three trading days out of five this week.

     BONDS: The yield on benchmark 10-year China government bonds was last at

3.8900%, down from the previous close of 3.9100%.

     STOCKS: Stocks were down, led lower by steel sector. The benchmark Shanghai

Composite Index closed down 0.80% at 3,266.14. Hong Kong's Hang Seng Index was

1.19% lower at 28,820.67.

     FROM THE PRESS: 

     China needs to pay close attention to the accelerating withdrawal of global

monetary policy easing and react as needed in a timely and proper manner, the

Economic Information Daily said in the front page commentary on Friday. China

should be fully prepared for the spillover effects of monetary policy in

developed countries, the commentary warned. Some emerging countries have made

moves to offset the impact by cutting interest rates, which indicates economic

growth drivers in those countries are fading. But it is hard to reverse the

impact of the world-wide monetary policy tightening trend, which could increase

the risk of capital outflows from emerging markets, the commentary noted.

(Economic Information Daily)

     The Chinese bond market is expected to see a short-term recovery after the

People's Bank of China's interest rate hike Thursday and given the stable

performance of economy, but institutions are still worried about rising pressure

on bond yields later next year, the China Securities Journal reported Friday.

The slight 5 bps rate hike was much smaller than market expectations, so the

PBOC will have to adjust its policy rates more frequently as the Federal Reserve

continues to hike its rates, the report said. The official launch of the new

regulation to control asset management products will worsen the bond market

situation. The yield on government bonds will fall in the first quarter of next

year, but there will not be a downward trend, with upward pressure later on, the

report predicted. (China Securities Journal)

     The issuance of two-year government bonds should be increased as this is a

key medium-term tenure on the government bond yield curve, the People's Daily

reported Friday, citing Zhang Jiqiang, the managing director of fixed-asset

department of China International Capital Corporation. Important price about the

government bond yield curve will be generated via an increase in the size and

frequency of two-year government bond issues, and so improve the efficiency of

compiling the yield curve, Zhang said. In addition, more two-year issues would

inject needed liquidity with that duration, Zhang said. (People's Daily)

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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