MNI China Daily Summary: Friday, July 24

     BEIJING (MNI) - TOP NEWS: China on Friday ordered the U.S. to close its

Chengdu consulate, the Ministry of Foreign Affairs said on its website. The

ministry informed the U.S. embassy today about the decision and other details

about the closure, although no formal date was given. The measure is a

"legitimate and necessary response" to the U.S.'s July 21 order to close the

Chinese consulate in Houston, the ministry said.

     EXCLUSIVE: Any U.S. move to limit Chinese access to dollar transactions in

response to China's extension of its security laws to Hong Kong would only

prompt Beijing to accelerate its international drive to encourage use of the

yuan, an advisor to China's top administrative body told MNI. "China may be

affected in the short term. But China would step up its international promotion

of the yuan through its Belt and Road initiative, and even promote an

international yuan settlement system. Europe wouldn't stand in line with the

U.S. on this either," Wang Huiyao, president of the Center for China and

Globalization and advisor to the State Council, said in an interview on Tuesday.

     POLICY: Any decoupling between the U.S. and China is "selective" and driven

by Washington's attempts to slow China's moves to upscale its manufacturing

sector, according to a senior advisor with a think-tank affiliated to the

Ministry of Foreign Affairs. The moves come largely in areas such as hi-tech,

but this was "not an area of close cooperation between China and the U.S.

originally," Shen Yamei, Deputy Director and Associate Research Fellow,

Department for American Studies at the China Institute of International

Studies(CIIS), told a press conference today.

     POLICY: Chinese Premier Li Keqiang has warned that this year's larger

fiscal deficit and the CNY2 trillion issuance of special treasury bonds must be

used for their intended purposes, which is to help businesses and the people

recover from the pandemic disruptions. Authorities, he said, should seek to have

the policies implemented quickly.

     LIQUIDITY: The People's Bank of China (PBOC) skipped open market

operations, resulting in a net drain of CNY200 billion given the same amount of

reverse repos matured today, according to Wind Information. The total liquidity

in the banking system is reasonable and ample, the PBOC said on its website.

     RATES: The seven-day weighted average interbank repo rate for depository

institutions (DR007) fell to 2.1025% from Thursday's close of 2.1891%, Wind

Information showed. The overnight repo average decreased to 1.8375% from 1.8487%

on Thursday.

     YUAN: The currency weakened to 7.0162 against the dollar from Thursday's

close of 6.9961. PBOC set the dollar-yuan central parity rate higher at 6.9938,

compared with the 6.9921 set on Thursday.

     BONDS: The yield on 10-year China Government Bonds was last at 2.8600%,

down from Thursday's close of 2.9050, according to Wind Information.

     STOCKS: The Shanghai Composite Index tumbled 3.86% to 3,196.77, while the

CSI300 index lost 4.39% to 4,505.59, as investors fretted over a sharp

escalation of tensions between China and the U.S. Hong Kong's Hang Seng Index

dropped 2.21% to 24,705.33.

     FROM THE PRESS: Beijing has taken no initiatives to escalate the already

tense relations with the U.S. and has vowed not to do so in the future, official

newspaper the China Daily said in an editorial on Friday. The editorial said

Beijing's decision not to escalate the conflict was a sign of restraint, not

weakness, and showed that China hoped the U.S. would come to its senses and back

off from confrontation. The U.S. would have difficulty in forming a united front

against China as its allies are unwilling to wager their future on the actions

of the current U.S. administration and recognize China's achievements under the

rule of the Communist Party, the Daily said, referring to Secretary of State

Mike Pompeo's recent speech on China, delivered in London.

     The PBOC is likely to increase liquidity injections via conducting more

reverse repos or cutting banks' reserve requirement ratios (RRRs) to ease

month-end tight liquidity and bridge the shortage caused by the issuance of

special Treasury bonds, with CNY140 billion remaining through July, the

newspaper said citing analysts.

     The PBOC is likely to pursue a balanced release of credit in H2 that

matches the pace of recovery while keeping liquidity at moderate levels, the

China Securities Journal reported citing analysts. The manufacturing sector and

private and small companies are the key sectors requiring funds during the

recovery period, the newspaper said. The PBOC will manage fund flows to avoid

arbitrage and the misallocation of resources, and the central bank will pursue

more innovative tools to direct funds to the real economy, Wang Jianhui, head of

the Research Institute of China Minsheng Bank, told the newspaper.

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

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

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