MNI China Daily Summary: Friday, November 3

     TOP NEWS: The expansion in the Chinese services sector accelerated modestly

in October but remained weak by historical standards, as input and output prices

grew at a moderate pace, according to the latest survey of purchasing managers

jointly released by Caixin magazine and Markit. The headline index rose to 51.2

in October, up from the 21-month low of 50.6 in September, but the reading was

still the second lowest this year.

     LIQUIDITY: The People's Bank of China injected CNY404 billion in one-year

Medium-term Lending Facility (MLF) loans Friday, with the rate unchanged at

3.20%, the PBOC said on its official website. The PBOC also skipped open-market

operations for the second day in a row. This resulted in a net injection of

CNY107 billion for the day, as a total of CNY90 billion in reverse repos and

CNY207 billion in MLF loans matured on Friday. A total of CNY396 billion in MLF

loans are scheduled to mature in November. The PBOC injected a net CNY87 billion

in liquidity this week, including reverse repos and MLFs.

     RATES: The Ministry of Finance sold CNY15 billion in 91-day treasury bills

at a yield of 3.5132% in an auction on Friday. The yield was higher than the

3.5074% for bonds with the same maturity in the secondary market on Thursday.

     RATES: Money market rates fell. The seven-day repo average was last at

2.7376%, lower than Thursday's average of 2.8437%. The overnight repo average

was at 2.5309%, lower than Thursday's 2.5626%.

     YUAN: The yuan fell against the U.S. dollar even though the People's Bank

of China set a stronger daily fixing. The yuan was last at 6.6217 against the

U.S. unit, compared with the official closing price of 6.6063 on Thursday. The

PBOC set the yuan central parity rate against the U.S. dollar at 6.6072,

stronger than Thursday's 6.6196. It was the fourth straight day the PBOC has set

a stronger fixing.

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

3.8800%, up from the previous close of 3.8725%, according to Wind, a financial

data provider.

     STOCKS: Stocks were down, led lower by the coal sector. The benchmark

Shanghai Composite Index closed down 0.34% at 3,371.74. Hong Kong's Hang Seng

Index was 0.28% higher at 28,599.14.

     FROM THE PRESS: China will become a main investment destination as the

global economy enters a new growth cycle, Wang Yu, vice director of the research

bureau of the People' s Bank of China, said Friday at a financial forum in

Hangzhou. Over the next two years, the U.S. Federal Reserve is expected to

increase interest rates twice or three times each year, so as of the end of

2019, the benchmark interest rate of the Fed could reach as high as 3%, Wang

noted. As a result, Wang predicted, the U.S. dollar index will continue to rise

while commodity prices will linger at a relatively low level.

     It is too early to say the current improvement in bank asset quality has

become a trend, although banks have actively shrunk their balance sheets under

stricter regulation, the Financial News, a journal run by the People's Bank of

China, reported Friday. Debt risks have been reduced, judging from the decrease

in debt defaults so far this year, the report said, adding that as of the end of

September, debt defaults totaled CNY23.68 billion, compared with CNY40.3 billion

for all of 2016. But economic downturn pressures are still large and credit

quality in some regions and sectors could plunge as cuts in overcapacity and new

environmental protection initiatives are implemented, the report warned.

Insufficient private investment and rising borrowing costs will put further

pressure on corporate debt burdens, the report warned. (Financial News)

     The short-term volatility of the yuan exchange rate will not change its

internationalization trend, the People's Daily reported Friday. The Chinese

government mouthpiece was responding to Western media comments on the slowdown

of the currency's internationalization given data from the Society for Worldwide

Interbank Financial Telecommunication (SWIFT) showing that the yuan's share of

international payments is now smaller than it was two years ago. From a trade

and investment perspective, the drive for yuan internationalization has never

changed, the newspaper said. The process faces challenges, including maintaining

a stable yuan exchange rate, the current limited ability and relative high cost

of hedging yuan exchange rate risks, and limits at the moment on the amount of

assets priced in yuan, the report admitted. The use of the yuan in global

markets will increase in the long term as the Chinese economy continues to grow

and Chia's "One Belt, One Road" initiative is pushed forward, the report

stressed. (People's Daily)

     New commercial bank loans are expected to decline significantly in October

due to further curbs on the property sector and because of seasonal factors, the

Securities Times reported Friday. Since September, authorities have banned the

use of consumer loans for property purchases, in addition to enhancing

punishments for property buyers who fund down payments in illegal ways. This

will contribute to a fall in short-term household loans in October, the report

predicted. Banks have largely used up their credit quotas due to the robust

expansion of new loans in the first nine months of this year, the report noted,

adding that as of the end of September, total new loans had reached CNY11.16

trillion, or some 88% of total new loans granted last year. (Securities Times)

     China needs to enhance financial regulation to prevent financial risks from

causing major shocks to the economy, the Economic Information Daily said Friday

in a front-page commentary. The regulatory duty shouldered by the central bank

should be emphasized and a "double pillar" management framework combining

monetary policy and macro-prudential policy should be optimized, the commentary

argued. The drafting of appropriate financial laws needs to be accelerated and

corporate governance within financial institutions needs to be strengthened, the

commentary stressed. (Economic Information Daily)

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

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

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