MNI China Daily Summary: Friday, December 28

     POLICY: Unless there is a worse than expected outcome from the U.S./China

trade talks come February, there is only a slim chance of the yuan breaking

above 7.0 against the U.S. dollar, although the pair will likely remain volatile

in an wide trading band, a government advisor told MNI in an interview. "There

is still a possibility USDCNY breaks the key level of 7 in the first quarter of

next year, particularly if the dollar index rises, maybe approaching 100, as

sterling and the euro weaken under the pressure of Brexit uncertainty," said

Zhao Qingming, chief economist at the Financial Derivatives Institute of the

China Financial Futures Exchange, the only authorized futures exchange in China.

     LIQUIDITY: The People's Bank of China (PBOC) injected CNY150 billion into

the system Friday via 7-day reverse repos, and CNY100 billion via 14-day reverse

repos today, a 10th consecutive trading day that the central bank has added

liquidity through open market operations(OMOs). It resulted in a net injection

of CNY220 billion given the maturity of CNY30 billion of reverse repos,

according to Wind Information. The PBOC said today's OMO is to stabilize

liquidity condition at year-end.

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

institutions (DR007) increased to 3.0709% from Thursday's close of 2.7856%, Wind

Information showed. The overnight repo average decreased to 1.3524% from

Thursday's 1.7196%.

     YUAN: The yuan appreciated against the dollar, as USDCNY edged lower to

6.8658 against Thursday's close of 6.8660. The PBOC set the dollar-yuan central

parity rate at 6.8632 Friday, compared with 6.8894 Thursday.

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

3.2250%, down from the close of 3.2700% on Thursday, according to Wind

Information.

     STOCKS: The benchmark Shanghai Composite Index closed 0.44% higher at

2,493.90. Hong Kong's Hang Seng Index rose 0.10% to 25,504.20.

     FROM THE PRESS: China should increase its deficit to more than 3% of GDP

next year, said Feng Qiaobin, a professor at the Chinese Academy of Governance,

the National Business Daily reported. Other proactive fiscal policy, including

increasing budget expenditure, issuing more debt and reducing taxes, are also

effective, Feng was cited saying. Keeping the rate below 3% can send a signal to

local governments, reminding them to control the investment and financing

expansion, and especially to strictly control the increase of debt, the report

said.

     China is more at ease dealing with the trade war waged by the U.S. as it

has decided to focus on deepening reform and opening up, instead of "being

all-in to fight against the U.S." the Global Times said in an editorial

Thursday. Although the trade war and the U.S. attacks on Huawei and ZTE have

raised China's concern about outside pressure, no external force can bring China

down and those who try will pay a heavy price, the newspaper warned.

     The additional liquidity released by the PBOC has kicked into the real

economy as money and credit have grown steadily in the second half, the

Financial News, a newspaper run by the central bank, said Friday. The rates on

bonds have dropped significantly, while the lending rate has steadily declined,

which also shows that liquidity is taking effect, 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$$$]