MNI China Daily Summary: Friday, December 29

     TOP NEWS: The People's Bank of China announced Friday that it will set up a

"temporary required reserves usage arrangement" during the coming Lunar New Year

holiday that will allow commercial banks to take out and use no more than two

percentage points' worth of their required reserves parked in the PBOC for a

period of 30 days. The central bank said the move was being made to maintain the

stability of money markets, considering the current liquidity demands of banks. 

     RATES: Money market rates were higher. The seven-day repo average was last

at 3.0508%, compared with Thursday's average of 2.9769%. The overnight repo

average was at 2.9176%, compared with Thursday's 2.6577%.

     LIQUIDITY: The People's Bank of China skipped open-market operations on

Friday, saying that an increase in fiscal spending toward the year-end can hedge

the impact of maturing reverse repos and that liquidity conditions are still at

a high level. This resulted in a net drain of CNY50 billion for the day, as a

total of CNY50 billion in reverse repos matured. It was the sixth consecutive

trading day that the PBOC has skipped OMOs. The PBOC has drained a net CNY290

billion from the interbank market this week.

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

the People's Bank of China set the fixing rate stronger for the day. The yuan

was last at 6.5076 against the U.S. unit, compared with the official closing

price of 6.5348 on Thursday. The People's Bank of China set the yuan central

parity rate against the U.S. dollar at 6.5342 on Friday, stronger than

Thursday's 6.5412. Today's fixing was the highest since Sept. 12.

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

3.9050%, higher than the previous close of 3.9000%.

     STOCKS: Stocks rose, with the printing and packaging and ceramics sectors

leading gains. The benchmark Shanghai Composite Index closed up 0.63% at

3,296.38. Hong Kong's Hang Seng Index was 0.31% higher at 29,957.32.

     FROM THE PRESS: The Fiscal Work Conference this week determined that China

will deepen tax reforms next year to better distribute income between the

central government and local governments, the Economic Information Daily

reported Friday, citing unidentified officials in the Ministry of Finance. The

conference also emphasized that China will continue to cut taxes and lower

government fees. Fiscal policies will remain active for the 11th consecutive

year, and government expenditure will be more sustainable, the report said.

Local governments' debt risks needs to be countered, it said. The conference

also determined that China will improve its fiscal policies to support people

who used to live in the countryside in acquiring official residency when they

move into cities, the report added. (Economic Information Daily)

     The campaign to reduce overcapacity in the steel industry has been

effective, the Economic Information Daily reported Friday. Production capacity

has been cut by 115 million tons, which exceeds the minimum target of a 100

million ton reduction cut before 2020. The campaign will continue in 2018, with

a prohibition on adding new capacity. (Economic Information Daily)

     Nonbank financial institutions have been under pressure to borrow to make

it through the end of the year, while liquidity conditions have been better for

banks, the China Securities Journal reported Friday. The People's Bank of China

has reiterated that overall liquidity conditions are at a relatively high level,

meaning that any tightness is structural, caused by regulatory and funding

pressures. Liquidity conditions might improve in the first quarter of 2018, when

a set of favorable factors is expected, the report said. Fiscal spending,

targeted cuts to required reserve ratios and banks' greater willingness to lend

will likely offset tax payments, higher cash demand for the Lunar New Year

holiday and maturing reverse repos, the report said. (China Securities Journal)

     The State Council has sent a signal that changes to the local government

tax system have begun and more are on the way, the Securities Daily reported

Friday. The council has determined that an environmental protection tax that

begins Jan. 1 will be fully included in local governments' income. In the

future, some consumption taxes might be allocated to local governments, which

will also benefit from the establishment of real estate taxes, the newspaper

said, citing unidentified people with knowledge of the tax plans. (Securities

Daily)

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

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

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