MNI China Daily Summary: Friday, July, 27

     TOP NEWS: China's banking sector is vulnerable to growing risks from

smaller regional banks with deteriorating credit standings due to mounting bad

debts, poor risk control and tougher regulations, multiple sources told MNI.

     TOP NEWS: China may report higher-than-expected GDP this year as the

government's stimulus policies will buttress the domestic economy, Xu Hongcai,

deputy chief economist at the China Center for International Economic Exchanges

and an advisor to China's economic planning department said in an interview with

MNI. "The 'around 6.5%' GDP target will certainly be met, and the whole-year

growth will be higher than 6.5%," Xu said.

     POLICY: China and the U.S. are not in contact to resume trade talks and

"the preconditions for negotiations are integrity and trustworthiness," Gao

Feng, a spokesman for China's Ministry of Commerce (MOFCOM), said during a press

conference on Thursday. No comment was provided on whether the Chinese

regulatory authorities will approve the Qualcomm-NXP deal; however, Gao pointed

out that the matter is an anti-trust issue and is not linked to ongoing

U.S.-China trade tensions.

     DATA: Profit growth of Chinese industrial companies softened in June as the

monthly rise in input prices outpaced that of output prices to push up

production costs, the National Bureau of Statistics (NBS) showed. Industrial

profits for June rose by 20.0% y/y to CNY658.29 billion, easing from the rapid

growth rate of 21.1% y/y in May.

     LIQUIDITY: The People's Bank of China (PBOC) drained a total of CNY370

billion via reverse repos this week. The PBOC skipped open market operations for

a fourth consecutive day on Friday, stating that a relatively high level of

liquidity can absorb maturing reverse repos. The CFETS-ICAP's money-market

sentiment index closed at 30 on Thursday, down from 32 on Wednesday.

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

2.6248% on Friday from 2.6338% on Thursday; the overnight average decreased to

2.2632% from 2.2938% on Thursday: Wind Information.

     YUAN: The yuan weakened to 6.8050 against the U.S. dollar on Friday from

Thursday's 6.7825 closing, following today's weaker fixing. The PBOC set the

yuan central parity rate at 6.7942, weaker than Thursday's 6.7662. Regarding

these developments, Credit Suisse commented that "the recent depreciation of the

CNY has raised questions about its impact on China's external debt." However,

the Swiss bank goes on to point out that its analysis suggests that "China's

liabilities are just too small relative to its economy and FX reserves to

threaten macro stability."

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

3.5250%, down from the previous close of 3.5300%, according to Wind Information.

     STOCKS: Shares in Shanghai declined for a third consecutive day. The

Shanghai Composite Index closed 0.30% lower at 2873.59. Hong Kong's Hang Seng

Index fell 0.33% to 28763.47.

     FROM THE PRESS: Mixed ownership reform and the restructuring of state-owned

enterprises (SOEs) are expected to accelerate, Shanghai Securities News

reported, citing Li Jin, chief researcher at the China Enterprise Research

Institute, in comments made after the State Council's state-owned enterprise

reform meeting on Thursday night. The reform will tailor policies to central

SOEs and local SOEs to echo the meeting's call for "categorical classification,"

Li said, according to the newspaper. The reform will focus on "defining central

SOE's main business" to avoid homogenous competition, Li said. This move is

consistent with China's adjustment of its economic structure, Li added,

according to the newspaper.

     As turned out to be the case, China Securities Journal reported that the

PBOC would likely refrain from conducting open market operations (OMO) for a

fourth consecutive day on Friday, as liquidity in August is expected to remain

at a high level. The PBOC's monetary policy moves will be made in step with

fiscal policy, and the PBOC may pause the OMOs until early August, the newspaper

said. However, the depreciation of the yuan against the U.S. dollar may result

in reduced forex purchases, which together with large government bond issuance,

could lead to a potential liquidity shock, the newspaper added, citing anonymous

traders.

     China should strengthen its reform drive to bolster domestic consumption as

a driver of China's economy, China Securities Journal reported, citing experts,

including Guo Lei, chief analyst of GF Securities. Consumption has started to

play a bigger role in China's economy, but the government should cultivate

services consumption further, said Huang Wentao, chief analyst at China

Securities Corporation. Individual income tax reform and high-tech manufacturing

innovation will also stimulate long-term consumption growth, the newspaper said.

Local governments should clamp down firmly on speculative investment in real

estate to encourage more efficient consumption, Huang added, according to the

newspaper.

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

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

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