MNI China Daily Summary: Friday, May 10

     TOP NEWS: China will have to take countermeasures in response to the U.S.

hiking the tariffs on $200 billion of Chinese exports to 25% from 10%, according

to a statement on the website of the Ministry of Commerce today. China hopes the

U.S. can agree to resolve existing problems through cooperation and consultation

via the ongoing 11th round of trade talks, the ministry said.

     EXCLUSIVE: China may prefer to extend trade talks with the U.S rather than

offering too many concessions to Washington's demands, as conceding ground could

be worse than any additional tariffs, advisors to the government have told MNI.

"For China, the worst case is not that (U.S. President) Trump slaps on tariffs,

but in making too many concessions because of concerns over them," said Yu

Miaojie, a veteran trade expert who advises Chinese government departments. Yu's

comments came as China appears to be taking a tougher stance against increasing

demands from the U.S. administration now accusing China of reneging on previous

commitments.

     EXCLUSIVE: The People's Bank of China (PBOC) is unlikely to cut the reserve

requirement ratio again this year and should exercise caution over any further

easing in order to prevent excess liquidity further boosting asset prices and

risking all the gains from Beijing's deleveraging moves, a former PBOC official

and government advisor told MNI. Noting the depth of liquidity currently in the

interbank market, Sheng Songcheng, former director of the financial survey and

statistics department of the PBOC, said whether the central bank's policy would

turn to a "neutral" bias will depend on overall economic performance. "The

monetary policy is to take a step at a time," he said.

     POLICY: Escalating trade conflicts between China and the U.S. will have

only a small impact on the Chinese economy because the real economy and capital

markets have become more resilient to external shocks, Ma Jun, a member of the

monetary policy committee of the PBOC, said in an interview with the Financial

News, a newspaper run by the central bank. A combination of hiking US tariffs on

$200 billion of Chinese exports from 10% to 25% and Chinese countermeasures

would shave about 0.3 percentage point off China's growth, and the negative

impact of the tariff hikes is controllable, Ma said.

     YUAN: China's yuan could face fresh depreciation pressure should the trade

talks between Beijing and Washington sour, with a chance the 7 level could again

be tested against the U.S. dollar as the Chinese authorities' stabilization

tendencies lessen, a government advisor told MNI in an interview. After months

of relative stability in the currency market, volatility in the pair will pick

up if uncertainties build, said Zhang Ming, a senior fellow at the Institute of

World Economic and Politics under the Chinese Academy of Social Sciences.

     YUAN: The yuan strengthened to 6.8118 from Thursday's close of 6.8227. The

PBOC set the dollar-yuan central parity rate at 6.7912 today, higher than the

6.7665 set on Thursday.

     LIQUIDITY: The PBOC skipped open market operations for the second trading

day, leaving liquidity unchanged as no reverse repos matured, according to Wind

Information. Total liquidity in the banking system is at a relatively high

level, according to the PBOC.

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

institutions (DR007) rose to 2.7300% from Thursday's close of 2.4859%, Wind

Information showed. The overnight repo average increased to 1.8400% from

Thursday's 1.5223%. 

     BONDS: The yield on 10-year China Government Bond was last at 3.2925%, down

from Thursday's close of 3.2950%, according to brokers.

     STOCKS: The benchmark Shanghai Composite Index rose 3.10% to 2,939.21, the

largest gain in more than a month, led by chips, 5G, software, military

industrial and liquor shares, according to Wind Information. Hong Kong's Hang

Seng Index increased 0.84% to 28,550.24. 

     FROM THE PRESS: Chinese Vice Premier Liu He arrived in Washington for trade

talks and expressed China's intention to resolve differences with the US. Liu,

who is China's senior trade negotiator, was reported by CCTV as saying that

China was hopeful the talks would achieve results and that he would negotiate in

a frank, confident and rational manner.

     U.S. threats to hike tariffs will only dampen China's GDP by less than 1%

because the contribution of exports has been declining, Global Times said in an

editorial today. The worst-case scenario after US tariff hikes on all Chinese

goods was that 8% of Chinese exports may need to find new destinations, the

newspaper said citing unidentified economists. Half of this 8% was likely to

find new channels, meaning that only 4% of Chinese exports will be affected.

Global Times said it was difficult for additional US tariffs on Chinese goods to

last for more than a year, because one-fifth of U.S. imports are from China.

     The PBOC could adopt a loosening bias for monetary policy if further

external headwinds weigh on the economy, according to a report in the Economic

Daily. It is necessary for the PBOC to fill in the short term liquidity gap

given the maturity of CNY156 billion so-called Medium-term Lending Facility and

a drain of seasonal fiscal funds in May, the newspaper said citing Chen Yi, a

researcher with the Bank of Communications. In the long term, the maturity of

more than CNY3 trillion of MLFs could also require supplementary liquidity,

according to Chen.

--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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