MNI China Daily Summary: Friday, January 5

     TOP NEWS: After Chinese President Xi Jinping urged government officials to

fight the "war to defend the blue sky" late last year, Chinese media touted

unprecedented efforts by environment officials to reduce air pollution,

including closing down unregulated steel mills and issuing a blanket ban on

industrial production when air quality fell below set limits. Yet there is

little indication China's overall steel output has been adversely affected.

Indeed, overall output continued to grow last year and there are indications

that China is expanding new capacity to produce higher quality products to

better compete in world markets. China will "walk its own path," decide on its

own policies and strategies and become an even stronger steel nation, Liu

Zhenjiang, chairman of the state-backed China Iron and Steel Association, said.

     TOP NEWS: Bank of China said Friday that it expects the yuan to strengthen

back to the same level it was at before exchange-rate reforms were implemented

on Aug. 11, 2015, due to the current presence of five factors: China's stable

economic performance, a basic balance of cross-border capital flows, a weak U.S

dollar index, a wide interest rate spread between China and U.S government

bonds, and active forex management by Chinese government regulators. On Aug. 11,

2015, the People's Bank of China unexpectedly announced it was changing its

central parity rate determination mechanism, using the closing rate of the

previous day as the main reference for setting the yuan's exchange rate. Since

that day, when the yuan was valued at about 6.2 against the U.S. dollar, the

yuan has mostly been on a depreciation track. Bank of China did not say when it

expected the yuan to reach a level of 6.2. 

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

Friday, saying the liquidity level in the banking system is at a "relatively

high" level and the impact of banks' required reserve payments can be absorbed.

This left liquidity conditions unchanged, as no reverse repos matured on Friday.

It was the 10th consecutive trading day that the PBOC has skipped open-market

operations. The PBOC drained a net CNY510 billion via open-market operations

this week.

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

at 2.6835%, compared with Thursday's average of 2.7010%. The overnight repo

average was at 2.4406%, compared with Thursday's 2.4324%.

     RATES: The Ministry of Finance sold CNY10 billion in 91-day treasury bills

at a yield of 3.2966% in an auction on Friday. The yield was lower than the

3.5140% that bonds with the same maturity fetched in the secondary market on

Thursday.

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

China set the fixing rate stronger for the day. The yuan was last at 6.4889

against the U.S. unit, compared with the official closing price of 6.4968 on

Monday. The People's Bank of China set the yuan central parity rate against the

U.S. dollar at 6.4915 Friday, stronger than Thursday's 6.5043. The PBOC set the

fixing stronger for three trading days out of four this week, and today's fixing

was the highest since May 3, 2016.

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

3.9200%, compared with the previous close of 3.9325%.

     STOCKS: Stocks were up, led higher by the property and healthcare sectors.

The benchmark Shanghai Composite Index closed up 0.18% at 3,391.75. Hong Kong's

Hang Seng Index was 0.07% lower at 30,714.99.

     FROM THE PRESS: Economic growth will be driven by investment and

consumption this year, the Economic Information Daily, a newspaper under the

official Xinhua News Agency, reported Friday. Fixed-asset investment is expected

to rise about 6.5% this year, boosted by investment in the manufacturing sector,

the newspaper said, citing various sources. Consumption growth is projected to

be 10%. With investment in infrastructure and the property sector still under

tight supervision as the government clamps down on financial risks, the

highlight of investment growth will be in the manufacturing sector, which will

enhance return on investment through innovation, the newspaper cited one source

as saying. Investment and consumption will focus on industries with high

value-added, the report said. (Economic Information Daily)

     The issuance of negotiable certificates of deposit (NCDs) dropped rapidly

last year and 2018 will see a further decline due to tighter government

regulations, the Shanghai Securities News reported Friday. As of Thursday,

issuance quotas for this year reported by 670 banks were well below the level in

2017, the newspaper said, without revealing the aggregate decline. Some banks

cut their issuance quotas as much as 60% from last year, the newspaper said.

Financing via NCDs dropped for the first time in 2017, to CNY1.72 trillion, half

of the total in 2016, according to the newspaper. The decreasing reliance on

NCDs for funding means banks must restructure their debt portfolios and find new

ways to raise funds, the newspaper said. The decline in NCDs puts particular

pressure on medium- and small-sized banks, which are much less competitive in

attracting deposits than larger institutions. These banks may be forced to

shrink their balance sheets to offset the lack of financing. (Shanghai

Securities News)

     With the Chinese government signaling it will maintain the basic stability

of the yuan, it is hard to envision large fluctuations in the U.S. dollar-yuan

exchange rate this year, the China Securities Journal said in a front-page

commentary. The external environment is relatively beneficial for the yuan, with

non-dollar currencies expected to play a bigger role in the foreign exchange

market, the newspaper said. The fluctuation of the dollar was an important

reason for the appreciation or depreciation of the yuan in 2017 and will remain

an important influence, the commentary said. But whether the dollar-yuan

exchange rate continues to strengthen depends most on the performance of China's

domestic economy and the Chinese government's economic policies. China's

economic growth is expected to slow but downside risks are limited, and monetary

policy and financial supervision are very likely to remain restrictive, so the

yuan won't experience large jumps or declines this year, the newspaper argued.

(China Securities Journal)

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

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

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