**MNI China Daily Summary: Friday, January 26

     **TOP NEWS: December industrial profits gained 10.8% y/y to CNY824.2

billion, lower than the 14.9% growth seen in November. As China's supply-side

reform campaign enters a third year, the capacity-cutting measures are having

less impact on commodity prices and the sectors that have undergone changes.

 - Profits of large industrial companies tracked by NBS grew 21% y/y to CNY7.52

trillion in 2017, the highest gain since 2011, dwarfing the 8.5% y/y in 2016.

This was largely due to the effects from the supply-side reform. Limitations

placed on the out-of-favour companies boosted prices of products and hence those

able to continue producing.

 - State-owned industrial enterprises were heavily favored by supply-side

reform, as their profits grew 45.1% y/y in 2017, well ahead of the 6.7% growth

seen in 2016. This helped them repay debt, thus reducing non-performing loans

held by banks, most of which are also state-owned.

 - Profits of private industrial companies rose 11.7% y/y in 2017, only half the

average growth rate of industrial enterprises. While still higher than the 4.8%

recorded in 2016, the data clearly showed private companies benefitted

significantly less than SOEs from the reform measures.

 - The profit margin of industrial enterprises tracked by the NBS was 6.46%,

0.54 percentage point higher than last year.

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

that liquidity is at a "relatively high" level that can absorb the impact of

maturing reverse repos.

 - Net drain of CNY270 billion today after same amount of reverse repos mature

 - For this week, a net drain of CNY320 billion by OMOs, or CNY427 billion

accounting for maturing Medium-term Lending Facility (MLF) loans

     RATES: Interbank market rates diverged for the day

 - 7-day repo average last at 2.9100%, higher than 2.9064% yesterday

 - Overnight repo average 2.5226%, down from 2.5394% yesterday.

     YUAN: The Chinese yuan climbed to 6.3284 against the U.S. dollar from

yesterday's 6.3350 closing, following today's stronger fixing.

 - The PBOC set the yuan central parity rate vs the U.S. dollar at 6.3436, much

stronger than Thursday's 6.3916. 

 - The PBOC has set the fixing stronger for the week starting on Jan 22, which

helped the fixing gain almost 1.15% against the greenback. 

 - Today's fixing marks the highest since Nov 5, 2015.

***COMMENT: The weak U.S dollar is in part due to global wealth management

companies investing in non-dollar equity assets, Zhou Hao, economist with

Commerzbank Asia, said Friday in his blog. These groups are buying and holding

non-dollar equities, but with no rush to hedge the risk from by dollar short

position, weighing on the dollar, Zhou noted. 

     BONDS: Yield on 10-year China government bonds last traded at 3.9250%, down

from 3.9375% close yesterday: Wind Information.

     STOCK: The Shanghai Composite Index closed up 0.28% to 3558.13, while the

Hang Seng Index was last at 33,112.16, up 1.40%.

     FROM THE PRESS: China should not hike its benchmark interest rates as its

economy is at risk of a downturn and inflation is benign, the China Securities

Journal reported, citing analysts. 

- The PBOC should adjust liquidity conditions in the interbank market by raising

interbank rates in open market operations, the CSJ said. A rate hike may be

feasible under more mature domestic and overseas market conditions, the journal

added. 

***COMMENT: The gap between China's real money market rates and policy rates is

widening given the authorities' deleveraging campaign. Meanwhile, the real loan

rates are also rising faster that the benchmark interest rates, causing two

distortions that need to be addressed.

     Opening up China's financial markets should be in line with economic growth

and development of its financial systems, and reforming the sector too quickly

or immaturely introduces risks, the Economic Information Daily reported, citing

industry analysts' reaction to senior leader Liu He's speech in Davos. 

- Liu said this week that China will allow access to its markets at a pace

exceeding the world's expectations. 

- Tackling China's risks with shadow banking and local government debt will

remain a priority, newspaper cited industry analysts. 

***COMMENT: Xinhua is advocating caution. There is probably dissent on giving

too much financial-market access to overseas players, or at least access too

soon. Policy makers will have to balance these interests, so Liu's words

shouldn't be taken as a promise.

     Global leaders and investors bullish on China will be on the right side

history, the official English-language mouthpiece China Daily said on Friday in

an editorial. The newspaper blasted Western investors and commentators who

shorted or were pessimistic on China. They are still looking at China through

ideologically tinted glasses, holding views out of "perennial bias, arrogance

and complacency," it said. 

***COMMENT: It's unusual for the government publication China Daily, which

normally tries to sound more business-like, to be openly combative. China may be

firing warning shots to those gathered in Davos, especially given the anti-China

rhetoric by the Trump administration.

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

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

[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]