MNI China Daily Summary: Friday, March 1

     TOP NEWS: China's interbank market rates fell sharply today, weighed by an

abundance of surplus funds as recent cash drains on the system start to

dissipate, traders and analysts told MNI. "As demand for liquidity for tax

payments and China Spring Festival has eased, and given the injection from

fiscal spending, the interbank market has adequate liquidity," said Ming Ming,

the chief fixed-income analyst of CITIC Securities, the country's biggest

brokerage. "Since the money market rates are lower than their relevant policy

rates, the central bank could consider cutting policy rates as early as the

second quarter when the economy is expected to face headwinds and the Federal

Reserves may suspend rate hikes," said Ming, a former official in the Monetary

Policy Division at the People's Bank of China.

     RATES: The 7-day weighted average interbank repo rate for depository

institutions (DR007) fell to 2.0000% from Thursday's close of 2.6471%, Wind

Information showed. The overnight repo average decreased to 2.1400% from

Thursday's 2.5720%. 

     POLICY: Surging Chinese stock market may constrain the PBOC's opportunities

to further ease policy in coming months, although any sharp downturn in the

economy may still open the way for rate cuts, Zhang Bin, a senior fellow at the

China Finance 40 Forum think tank, told MNI. Further easing could add fuel to an

already on-fire stock market, underpinned by low rates and abundant liquidity,

Zhang said, while noting policymakers could already be on his wavelength.

"Policymakers are still cautious over large easing and may prefer a marginally

tighter stance if the economic situation has improved," he added, repeating

Premier Li Keqiang's recent comments warning against a flood of easy money.

     STOCKS: The benchmark Shanghai Composite Index rose 1.80% to 2,994.01, the

highest in almost nine months, fueled by MSCI's latest move to quadruple

weighting of China A-shares in its global benchmarks. The 6.77% gain this week

was the largest weekly growth since June 2015, Wind Information said. Hong

Kong's Hang Seng Index rose 0.63% to 28,812.17.

     DATA: The Caixin China manufacturing Purchasing Managers Index (PMI) jumped

1.6 points to 49.9 in February, a three-month high, but still below the 50

breakeven mark, in another sign that factory activities may be picking up. New

orders, which indicate future activity level, saw a moderate increase, mainly

due to the recovery of domestic demand. New export orders fell back into

contraction, indicating weak external demand, Caixin said in a statement.

     LIQUIDITY: The PBOC skipped open market operations, resulting in a net

drain of CNY40 billion, with the same amount of reverse repos maturing today,

according to Wind Information. The total liquidity in the banking system is at a

relatively high level, enough to offset the maturity of reverse repos and the

payment of local government bond issuance, said the PBOC.

     YUAN: The yuan depreciated against the dollar to 6.7078 from Thursday's

close of 6.6868. The PBOC set the dollar-yuan central parity rate higher for a

second day in nine trading days at 6.6957 on today, compared with 6.6901 set on

Thursday.

     BONDS: The yield on 10-year China Government Bond was last at 3.195%, down

1.3 bps from the close of Thursday, according to brokers.

     FROM THE PRESS: Chinese regulators haven't changed mortgage loan policies

and the speculation that restrictions are being relaxed to support the real

estate market isn't true, the Beijing News reported. The banking regulator will

continue to carry out stricter controls on speculative buyers through raising

the down payment ratio and adjusting the risk pricing of interest rates, the

newspaper said quoted Liu Chunhang, head of the Statistics Department at China

Banking and Insurance Regulatory Commission.

     About CNY776.84 billion local government bonds were issued in Jan-Feb,

pushing the total Q1 issuance to CNY1 trillion, the Securities Daily reported

citing its own calculation. The bonds will be used mainly for infrastructure

projects which may help drive a recovery, the newspaper said. 

     The China Banking and Insurance Regulatory Commission (CBIRC) will grant

more approvals to establish small and medium-sized banks and insurers, The Paper

said citin Xiao Yuanqi, the regulator's chief risk officer and spokesman. More

licenses to operate will also be granted to foreign financial institutions, it

said.

--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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