MNI China Daily Summary: Friday, February 2

     TOP NEWS: The yuan exchange rate may continue to rise while maintaining

relative stability, the Securities Times said in an analysis piece. China's

capital-flow management and economic development have improved, and the PBOC

seems to be more tolerant to bigger fluctuations of the yuan. Market watchers

expect the dollar index to slide further. The yuan's rise is caused by the

depreciation of the dollar and investors should track the effective exchange

rate.

     LIQUIDITY: The PBOC skipped its Open Market Operations (OMO) on Friday,

stating on its website that the liquidity in the banking system is "relatively

high", which can absorb the effects of maturing reverse repos and cash

withdrawals -- the same wording as given yesterday. Net drain of CNY90 billion

today after same amount of reverse repos mature. Net drain of CNY760 billion by

the PBOC via its OMOs this week. CFETS-ICAP money-market sentiment index closed

at 38 yesterday, slightly up from 37 at Wednesday's close. 

     RATES: Money market rates rose after PBOC drained a net of CNY90 billion

via its open-market operations. The 7-day repo average was last at 2.7431%, up

from Thursday's average of 2.7250%. The overnight repo average was at 2.4949%

compared with Thursday's 2.4782%.

     YUAN: The yuan gained against the U.S. dollar after the People's Bank of

China set a stronger daily fixing. The yuan was last at 6.2754 against the U.S.

unit, rising 0.33% compared with the official closing price of 6.2960 yesterday.

The PBOC set the yuan central parity rate vs the U.S. dollar at 6.2885 on

Friday, stronger than Thursday's 6.3045, marking the first time it broke 6.3000

since August 2015.

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

3.9050%, up from the previous close of 3.9000%, according to Wind.

     STOCKS: Stocks rose in Shanghai, led by coal mining companies shares, with

Huolinhe Opencut Coal Industry Corp. led the gain. The benchmark Shanghai

Composite Index closed up 0.44% at 3,462.08. Hong Kong's Hang Seng Index was

0.23% higher at 32,716.97.

     CHINA PRESS: China's abundant liquidity may extend to the first half of

March, China Securities Journal reported. The PBOC's targeted reserve

requirement ratio cut for some banks and Contingent Reserve Allowances both

contributed greatly to this money supply, which exceeds the market's

expectation. The yuan's appreciation, both against the dollar and a basket of

currencies, may lead to more capital flow into China, also improving liquidity:

market insiders.

     Local governments need to balance GDP growth with controlling debt, said

Liu Shijin, former deputy director of the Development Research Center of the

State Council, in a speech published by the 21st Century Business Herald. As

China transitions from high-speed growth to moderate and quality-focused

development, financial risks must be tackled to forestall a crisis, like many

economies after initial rapid growth. Local governments cannot allow

infrastructure investment to surge beyond being sustainable. As land prices will

likely fall, local governments and companies may find it hard to deal with

potential risks. Unlike before, they can no longer rely on selling land to make

up for the shortfall.

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

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

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