MNI China Daily Summary: Friday, July 20

     TOP NEWS: China's central bank and top financial regulator are coaxing

risk-averse banks into lending via both administrative orders and financial

incentives. The total social financing (TSF) measure and M2 growth, which both

recorded historical lows in June, may rebound if banks follow the instruction,

as both funding through the bond market and money supply via higher MLFs

increase. The liquidity stimulus could further weigh on the yuan exchange rate.

     POLICY: China's Ministry of Commerce (MOFCOM) gave no sign that trade

tensions with the U.S. are easing, suggesting that the two sides remain

deadlocked and no talks are proceeding.

     POLICY: The recent release of relatively downbeat Chinese Q2 GDP data could

prompt Beijing to take various measures -- including fiscal stimulus, larger OMO

injections and lower interbank rates -- to increase the likelihood of achieving

its 2018 full-year growth target of 6.5%.

     POLICY: The Chinese yuan slumped to a one-year low on Thursday, driven

lower by concerns surrounding the ongoing trade conflict between Washington and

Beijing, and raising fears of an acceleration in capital outflows. Chinese banks

were net purchasers of foreign currency for their clients in June, but total

forex purchases plummeted by 89.4% from May's level to CNY13.1bn.

     LIQUIDITY: The PBOC skipped its open market operations today, ending the

four continuous days of net injections, according to a statement on the PBOC's

website. The PBOC has injected a net CNY540bn this week. CFETS-ICAP's

money-market sentiment index closed at 31 on Thursday, down from 33 on

Wednesday.

     MONEY MARKET RATES: The benchmark 7-day deposit repo average fell to

2.6262% on Friday from 2.6331% on Thursday; the overnight average decreased to

2.3242% from 2.3846% on Thursday: Wind Information.

     YUAN: A softer PBOC fixing propelled both the USD/CNH & USD/CNY crosses

above their respective Thursday highs overnight, with USD/CNY crossing above CNY

6.80 for the first time since July 2017. The jolt higher in both crosses

triggered broader risk-off flows. They then witnessed sharp 200-pip pullbacks,

with subsequent chatter of the large Chinese state owned banks selling USD/CNY

around CNY6.81.

     BONDS: The yield on the benchmark 10-year China Government Bond was last at

3.5100%, up from the previous close of 3.4200%, according to Wind Information.

     STOCKS: Shares in Shanghai rebounded significantly overnight, ending a

five-day losing streak, led by the financial sector. The Shanghai Composite

Index closed 2.05% higher at 2829.27, rising back above the 2800-level. Hong

Kong's Hang Seng Index rose 0.64% to 28191.02.

     FROM THE PRESS: Amid the backdrop of deleveraging, financial institutions

have shifted away from off-balance sheet financing towards issuing corporate

loans and purchasing corporate bonds to provide liquidity for enterprises, Ruan

Jianhong, director of the Financial Survey and Statistics Department under the

PBOC, said in commentary published by Shanghai Securities News. This shift has

shortened the financing chain of the real economy and reduced financing costs,

Ruan said. She also pointed out that a decrease in entrusted loans and trust

loans drove the decline in social financing growth during the first half of the

year. Meanwhile, the slight slowing in M2 growth in June was primarily a result

of a contraction in commercial banks' interbank and equity investment

businesses, Ruan said.

     Monetary policy stimulus alone cannot resolve the decline in financial

institutions' risk appetite, Chen Jianheng, a fixed income analyst at CICC, told

Financial News. Fiscal policy has more room to act, as the growth of fiscal

expenditure was slower than that of fiscal revenue in the first half of the

year, Ming Ming, chief analyst at CITIC Securities, told the newspaper.

Increasing fiscal expenditure can help to alleviate the impacts of deleveraging,

Ming noted. The pace of tightening of off-balance sheet activities and its

impact on the real economy must be noted, Ming said, according to the newspaper.

     The current policy mix of "loose money and loose credit" is aimed at

encouraging banks to expand credit provision and at protecting private

enterprises from the impacts of the deleveraging drive, the Securities Times

said. China's deleveraging campaign has entered a stable stage, the newspaper

noted. By the second half of the year, monetary policy is expected to be

fine-tuned on the basis of maintaining a neutral and prudent level, while

regulatory policies will likely to be slightly relaxed to boost credit

expansion, the newspaper said.

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

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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

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