MNI China Daily Summary: Friday, May 31

     TOP NEWS: China's financial market is running smoothly, and the small and

medium-sized banks are stable with sufficient capital, provisions and ample

liquidity, said the PBOC-run newspaper Financial News citing Pan Gongsheng,

deputy governor of the central bank. By the end of Q1, the balance of

provisions, which small banks set aside for possible losses, increased 18% y/y

to CNY1.54 trillion, and the banks' ability to withstand risks increased

significantly, the newspaper cited Pan as saying. The PBOC will use various

monetary policy tools to keep liquidity ample, continue to lower reserve

requirement ratios for small banks, expand the scale of refinancing and

rediscounting, and encourage small banks to issue more bonds to better serve

small companies, the newspaper said citing Pan.

     **NOTE: Pan made the comment to calm the market after the central bank had

seized the control of a failing small bank, Baoshang Bank, located in Baotou,

Inner Mongolia autonomous region. 

     POLICY: China should focus its deleveraging efforts on state-owned

enterprises, as authorities allow overall debt to rise to stabilise the economy

in the face of headwinds, a government advisor told MNI. "State-owned companies

should be the major target, particularly the zombies," said Zhang Xiaojing,

deputy director-general of the National Institution for Finance & Development

(NIFD) at the Chinese Academy of Social Sciences (CASS), noting there was little

room for leverage reduction in the household sector. He accepted that some

increase in debt levels was necessary to stabilise the economy, but warned a

further burst of loose liquidity from the central bank could trigger excessive

growth in liabilities.

     DATA: China's PMI decelerated to 49.4 after April's 50.1, the National

Bureau of Statistics said. That is lower than MNI-survey forecast of 50. The

index fell back to contraction after two months of expansion, when the scale

tips above 50. The production index continued to edge down 0.4 pp from April to

51.7 in May, still above the breakeven 50. Meanwhile new orders fell sharply to

49.8 from April's 51.4, indicating declining demand. New export orders also

dropped sharply to 46.5 from 49.2 in April, pointing to decelerating external

demand.

     LIQUIDITY: The PBOC skipped open market operations (OMOs) today, leaving

liquidity unchanged as no reverse repos matured, according to Wind Information.

Total liquidity in the banking system is at a reasonable and ample level,

according to the PBOC.

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

institutions (DR007) fell to 2.2500% from Thursday's close of 2.6517%, Wind

Information showed. The overnight repo average decreased to 2.0000% from

Thursday's 2.0290%.

     YUAN: The yuan strengthened to 6.9020 from Thursday's close of 6.9051. The

PBOC set the dollar-yuan central parity rate at 6.8992 today, compared with

Thursday's 6.8990.

     BONDS: The yield on the 10-year China Government Bond was last at 3.2800%,

down from Thursday's close of 3.2850, according to Wind Information.

     STOCKS: The benchmark Shanghai Composite Index decreased 0.24% to 2,898.70.

Hong Kong's Hang Seng Index fell 0.79% to 26,901.09. 

     FROM THE PRESS: The PBOC is expected to inject liquidity into the banking

system in June to fill the liquidity gap created by the maturity of reverse

repos and interbank deposits, the China Securities Journal said in a front page

report today. The PBOC has shown intention to keep liquidity at an ample level

through recent injections, which came against the backdrop of a deteriorating

external environment and the seizure of a risky domestic small lender, the

newspaper said. The report said the PBOC would use a variety of tools to deal

with the liquidity gap.

     The PBOC's move to set up a Deposit Insurance Fund Management Company would

guarantee CNY68 trillion yuan of residents' deposits and minimize the impact on

the financial market due to the increasing risks in the banking system, the

Securities Daily said today. China's deposit insurance system was also perfectly

integrated with the global system, 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

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