MNI China Daily Summary: Friday, June 19

     BEIJING (MNI) - EXCLUSIVE: China would deploy its vast foreign reserves to

support Hong Kong's dollar peg if it ever came under serious pressure, policy

advisors told MNI, with an economist at Bank of China (Hong Kong) predicting

that the territory's currency would be supported by capital inflows for the rest

of the year thanks to interest rate differentials and share offerings. Continued

Sino-U.S. tensions could eventually prompt capital outflows, destabilising the

local financial market and undermining property prices, said one advisor in

Beijing, asking to remain anonymous. If coupled with a depressed economy, this

would erode the reserves which maintain the 36-year-old currency board keeping

the Hong Kong dollar within a band of 7.75-7.85 to the U.S. currency, he said,

pointing to fears that the U.S. could restrict the access of Hong Kong banks to

U.S. dollars.

     EXCLUSIVE: A CNY1 trillion sale of special Chinese Treasury bonds could

provide a boost to lower-returning infrastructure such as health, policy

advisors said, noting that the funds will be transferred on favourable terms to

regional governments whose participation in other initiatives aimed at financing

such spending has sometimes been lower than hoped for. A significant portion of

the CNY1 trillion would go towards health spending, said Zhang Yiqun, director

of a fiscal studies institute affiliated with Jilin province's finance

department. The central government will pay the interest on the Treasury bonds,

as well as CNY300 billion of the principal, increasing incentives to take on

spending which local administrations, already heavily-indebted, might otherwise

have shied away from.

     LIQUIDITY: The People's Bank of China (PBOC) injected CNY70 billion via

7-day reverse repos as well as CNY110 billion via 14-day reverse repos with

rates unchanged. This resulted in a net injection of CNY80 billion given the

maturity of CNY100 billion today, according to Wind Information. The operations

aim to maintain stable liquidity at the end of the half year, the PBOC said on

its website.

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

institutions (DR007) rose to 2.1340% from Thursday's close 2.0884%, Wind

Information showed. The overnight repo average increased to 2.1349% from 2.1146%

on Thursday.

     YUAN: The currency strengthened to 7.0725 against the dollar from

Thursday's close of 7.0812. PBOC set the dollar-yuan central parity rate higher

at 7.0913, the highest in 10 trading days and up from the 7.0903 set on

Thursday.

     BONDS: The yield on 10-year China Government Bonds was last at 2.8825%, up

from Thursday's close of 2.8700, according to Wind Information.

     STOCKS: The Shanghai Composite Index rallied 0.96% to 2,967.63. Hong Kong's

Hang Seng Index gained 0.73% to 24,643.89.

     FROM THE PRESS: The PBOC may conduct 28-day reverse repos or cut banks'

reserve requirement ratios (RRR) to boost liquidity during the issuance of

special treasury bonds, the Shanghai Securities News reported. Some analysts

believed relying solely on reverse repo operations may not be enough, and

providing long-term low-cost funds via RRR cuts to banks can also help drive

down bond yields to a reasonable level, the newspaper said. The PBOC yesterday

restarted injecting liquidity through 14-day reverse repos for the first time

since February and also cut the operation rate by 20 bps.

     The Beijing municipal government's strict management of people travelling

out of the city is to block coronavirus transmission and not a complete

lockdown, Caixin reported citing Deputy Director of the Beijing Public Security

Bureau Pan Xuhong. People who have been in the Xinfadi wholesale market since

May 30 or have close contact with the market staff, as well as those living in

communities deemed as medium and high-risk are banned from leaving Beijing and

those planning to leave the city must hold a negative virus test within 7 days,

Caixin cited Pan as saying.

     Mortgage interest rates have fallen for the sixth month and rates in

second-tier cities declined faster than those in the first-tier, The Paper

reported. The average mortgage rate for first homes was 5.28% in June

nationwide, down 4 bps from May, while that for second homes fell 3 bps to 5.6%,

the newspaper said citing the Rong 360 Big Data Institute. This is mainly due to

the 10 bps cut to the 5-year LPR in April, the newspaper said citing Li Wanbin,

analyst at Rong 360. Li said that one LPR cut would generally lead to reductions

in mortgage rates for two consecutive months, the newspaper added.

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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