MNI China Daily Summary: Friday, February 9

     TOP NEWS: China should maintain a prudent stance on liquidity and strictly

manage capital outflows to help tackle financial risks, whilst also guiding

growth to a sustainable level, a leading government economist told MNI in an

exclusive interview. "The central bank is endeavouring to strike the middle

ground of controlling leverage ratios without triggering a crisis, while guiding

growth onto a more sustainable path," said Zhu Baoliang, the chief economist at

the State Information Center. 

     TOP NEWS: China's yuan saw the largest one-day drop against the U.S. dollar

in two years Thursday, coming after China announced its global trade surplus

contracted by 58.9% in January. The USDCNY cross rate closed at 6.3260, surging

664 pips, the pair's biggest daily rise since August, 12, 2015, which was the

day after the PBOC suddenly allowed the yuan to depreciate by nearly 2% against

the U.S. dollar. The offshore pair, USDCNH, also rose sharply, up 809 pips

during the day to as high as 6.3771.

     DATA: China CPI in January rose 1.5%, the lowest since July, decelerating

from the 1.8% in December and in line with MNI's survey of forecasts. Inflation

was in part lower because of base effects as higher prices caused by last year's

earlier Chinese New Year dropped off. Food prices last month fell 0.5% y/y vs

0.4% y/y drop in December. There was a 2.7% rise in January 2017. More is in

MNI's story "5 Things We Learned from China January Inflation Data."

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

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

high" level which offsets the impact of cash withdrawals, the same wording as

yesterday. Today was the 12th day that the central bank has refrained from

conducting OMO. Liquidity condition remains unchanged as no reverse repo

matures. PBOC has drained a total of CNY220 billion via its open market

operations this week. CFETS-ICAP's money-market sentiment index closed at 42

yesterday, up from 40 at Wednesday's close.

     RATES: Money market rates diverged after PBOC's inaction of open-market

operations resulted in no changes of liquidity. The 7-day repo average was last

at 2.8212%, down from Thursday's average of 2.9065%. The overnight repo average

was at 2.5853% compared with Thursday's 2.5621%.

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

China set a weaker daily fixing. The yuan was last at 6.3180 against the U.S.

unit, dropping 0.13% compared with Thursday's official closing price of 6.3260.

The PBOC set the yuan central parity rate vs the U.S. dollar at 6.3194 on

Friday, weaker than Thursday's 6.2822. The central bank 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

3.8850%, unchanged from the previous close, according to Wind.

     STOCKS: Stocks dipped in Shanghai, led lower by coal company shares, with

Anhui Hengyuan Coal Industry Co Ltd down slightly more than 10%. The benchmark

Shanghai Composite Index closed down 4.05% at 3,129.85. Hong Kong's Hang Seng

Index was 3.02% lower at 29,530.45.

     FROM THE PRESS: The Chinese yuan's excess gain has set it up for inevitable

correction, 21st Century Business Herald said in a front-page commentary. As

China's trade surplus decreased, there is less support for yuan's further

appreciation, and the newly-released trade data triggered a sell-off in the

market fearing the currency's further drop, the newspaper said. U.S. economy's

strength further pressures yuan's outlook. China's stable economy prevents

yuan's long-term slide, Herald said.

     Some public-private partnership projects have been halted as banks view

them more risky, Shanghai Securities News reported. Banks are more cautious due

to government's tightening policies to control rapid expansion of PPPs, which

are sometimes disguised as local government debt. Banks are often the main

funding source of PPPs, not private capital and government funding, and even

private capital also often get loans from banks to invest in the projects. To

get loans from banks, PPP projects need to be selected by the Ministry of

Finance with good cash flow, the newspaper said.

     Chinese property developers are increasingly issuing bonds in overseas

markets because of a cheaper dollar and tight domestic financing situation,

Securities Times reported. Competition for consolidation is increasingly fierce

in the property sector, and tightening policies are hurting sales, newspaper

said. The volume of maturing bonds held by property developers will peak this

year, so offshore issuance is one of the few venues, Times said. While weakening

of the dollar makes offshore bonds less expensive, property developers may be

more vulnerable if the dollar rebounds, the paper said.

--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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