MNI China Daily Summary: Friday, July 28

     TOPS NEWS: Analysts are predicting that the scale of interbank negotiable

certificate of deposit (NCD) issuance will shrink significantly in the second

half, with profits from NCDs also dropping sharply, the China Securities Journal

reported in a front-page story Friday. Guangdong province's banking regulator

fined one bank CNY2 million for breaking NCD "business operation rules",

prompting discussion and shock in the market, and indicating that regulators

will continue to tighten oversight and levy more fines in the period ahead. An

interbank insider told the newspaper that banking regulators recently examined

many details of his bank's operations. The source said his bank's interbank

business had earned a profit of several hundred million yuan in the past two

years through a branch under the bank's Guangzhou City division, but it would be

lucky to earn a profit of CNY20 million to CNY30 million in the first half of

this year given the tighter regulatory climate. Analysts also told the newspaper

the property market is cooling down and "returning to a reasonable level," so

banks' profits from lending to the sector are also shrinking. 

     TOP NEWS: The People's Bank of China injected CNY100 billion in seven-day

reverse repos and CNY40 billion in 14-day reverse repos via open-market

operations Friday, Wind Information, a Shanghai-based financial data provider,

said. This resulted in a net injection of CNY40 billion for the day, as a total

of CNY100 billion in reverse repos mature on Friday. The PBOC injected a net

CNY280 billion in liquidity via its OMO this week, partly offset by the

expiration of CNY138.5 billion in Medium-term Lending Facility instruments,

indicating that overall the PBOC injected a net of CNY141.5 billion into the

interbank market. The CFETS-ICAP money-market sentiment index ended at 55 on

Thursday - up sharply from 40 at Wednesday's close. The lower the reading the

better the liquidity conditions in the interbank market.

     POLICY: The value of merger and acquisition transactions in China's

property sector is likely to rise to a record-high this year, Moody's Investors

Service said Friday in a report. Major developers want to increase their market

share by expanding their size to take advantage of the relatively low cost of

land acquisitions at a time when local governments are increasing land sales,

Moody's said. Given policy controls in the real estate sector are expected to be

tightened further, sector sales growth will slow further in the second half of

the year and operational conditions for property developers would face increased

barriers, the ratings agency said.

     RATES: Money market rates were mixed on Friday after the PBOC injected a

net of CNY40 billion via its open-market operations. The seven-day repo average

was last at 2.8237%, down from Thursday's average of 2.9341%. The overnight repo

average was at 2.8570% compared with Thursday's 2.8313%.

     YUAN: The yuan fell against the U.S. dollar Friday morning after the

People's Bank of China set a weaker daily fixing. The yuan was last at 6.7435

against the U.S. unit, dropping 0.09% compared with the official closing price

of 6.7376 on Thursday. The People's Bank of China set the yuan central parity

rate against the U.S. dollar at 6.7373 Friday, modestly weaker than Thursday's

6.7307.

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

3.8039%, up from the previous close of 3.7588%, according to Wind, a financial

data provider.

     STOCKS: Stocks rose, leading higher by iron ore and coal sector. The

benchmark Shanghai Composite Index close up 0.11% at 3,253.24. Hong Kong's Hang

Seng Index was 0.52% lower at 26,992.34

     FROM THE PRESS: Mortgage lending conditions are being tightened for the

fourth time this cycle, as lenders are now increasingly refusing to give

discounts below the benchmark rate set by the People's Bank of China, the

Economic Information Daily reported Friday. According to the newspaper, in most

hotspot cities borrowers are now receiving only small discounts on mortgage

rates or no discounts at all. According to Rong 360, a FinTech company that

offers mortgage lending products, the average mortgage rate in June was 4.89%,

99.7% of the benchmark interest and 3.38% higher m/m. More than 80% of banks no

longer offer mortgage rate discounts and 32 banks increased their mortgage rates

in June to 1.05 to 1.2 times the benchmark interest rate. Analysts predict

further tightening is likely to occur, the newspaper reported. (Economic

Information Daily)

     The rapid expansion of non-bank financial institutions has created many

potential risks, so China will tighten regulations to guide them to control

risks and better serve the real economy, the Economic Information Daily said on

its front page Friday. Because of fierce competition, non-bank financial

institutions usually pay more attention to scale than to quality, the newspaper

argued, noting that some insurance companies expanded too quickly by using

highly-leveraged capital, which harmed the real economy. China should learn from

the U.S. experience and consider extending the reserve requirement system to

non-bank financial institutions. (Economic Information Daily)

     U.S. Republican tax reform negotiators announced Thursday that they would

"set aside" the controversial border adjustment tax idea to advance their tax

reform effort. "While we have debated the pro-growth benefits of border (tax)

adjustability, we appreciate that there are many unknowns associated with it and

have decided to set this policy aside in order to advance tax reform," according

to the joint statement from six top House, Senate and White House officials.

China's official Xinhua News Agency reported the dropping of the BAT, which

would have taxed U.S. imports but not exports and which China opposed, but

offered no immediate commentary on the move. The unofficial Wallstreet CN warned

that there still much work to be done on tax reform to reassure an increasingly

skeptical market. "One theory behind the crazy jump in risk assets in the first

half of this year was the confidence the market had in (U.S. President Donald)

Trump's new political agenda, including healthcare reform, tax reform, increased

infrastructure investment and looser regulations. But there is little time left

for Trump from the perspectives of politics, the economy and the market," the

financial news and analysis provider said.

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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