MNI China Daily Summary: Friday, Sept. 22

     TOP NEWS: S&P Global Ratings left open the possibility that it could

upgrade China's sovereign credit ratings in the future if the government

successfully reins in rising debt and promotes the renminbi as a reserve

currency, or cut them further if its deleveraging campaign peters out. S&P

downgraded China's long-term sovereign credit ratings because it saw the

country's debt rising at a rate that would increase financial risks over the

next two to three years, Kim Eng Tan, the senior director of sovereign ratings

at S&P Global Ratings, said in a press conference Friday. China's Finance

Ministry sharply criticized the ratings downgrade, saying it was a "wrong

decision" that was "confusing," given the economic strides China has made over

the past few years and the fact that the government is actively pushing

supply-side reforms and has implemented a country-wide deleveraging campaign.

     LIQUIDITY: The People's Bank of China injected CNY100 billion in seven-day

reverse repos and CNY20 billion in 28-day reverse repos via open-market

operations. This resulted in no net injection or drain of liquidity for the day,

as a total of CNY120 billion in reverse repos matured. It was the third

consecutive day that the PBOC made no net injection or net drain. Traders said

the PBOC is likely to continue to inject liquidity next week given

cross-end-of-quarter factors and large cash demand ahead of the weeklong

National Day holiday the first week of October. But the PBOC injections will

depend in large part on how much liquidity government fiscal spending injects

into the market. A total of CNY580 billion in reverse repos will mature next

week. The CFETS-ICAP money-market sentiment index ended at 46 on Thursday, up

slightly from 44 at Wednesday's close. The lower the reading, the better the

liquidity conditions in the interbank market.

     RATES: Money market rates were lower. The seven-day repo average was last

at 2.9415%, compared with Thursday's average of 2.9421%. The overnight repo

average was at 2.7512%, compared with Thursday's 2.8269%.

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

of China set the fixing rate slightly stronger for the day. The yuan was last at

6.5953 against the U.S. unit, compared with the official closing price of 6.5934

on Thursday. The PBOC set the yuan central parity rate at 6.5861, 0.01% stronger

than Thursday's 6.5867.

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

3.5989%, compared with the previous close of 3.5946%.

     STOCKS: Stocks fell, with cyclical shares leading losses. The benchmark

Shanghai Composite Index closed down 0.16% at 3,352.53. Hong Kong's Hang Seng

Index was 0.73% lower at 27,905.38.

     FROM THE PRESS: Steve Bannon flew to Beijing last week for a secret meeting

with Wang Qishan, considered the second most powerful Chinese Communist party

official, less than a month after the former chief White House strategist

declared that America was in an "economic war with China," the Financial Times

reported Friday, citing people familiar with the situation. The two sides mainly

talked about economic nationalism and populist movements, which was the subject

of Bannon's speech in Hong Kong at an investor conference hosted by CLSA, a

Chinese state-owned investment bank, the FT said. There was no connection to

President Donald Trump's upcoming visit to China in November, one source told

the FT. (Financial Times)

     The People's Bank of China will not change policy following the Federal

Reserve's decision to begin shrinking its balance sheet and will continue to

push forward deleveraging at a moderate pace, the Securities Daily, an official

securities journal run by the State Council, said in a front-page commentary on

Friday. The PBOC's balance sheet shrank by CNY1.1 trillion in the first three

months this year and fell again in August by CNY346.6 billion, with both

declines due mainly to a reduction in fiscal deposits at the central bank, the

newspaper said. In the deleveraging campaign, the PBOC is dealing with liquidity

problems via money market instruments and is also enhancing credit distribution,

so it is not the proper time to talk about a reserve requirement ratio cut, the

commentary argued. (Securities Daily)

     The theory that S&P Global Ratings used in its downgrading of China's

sovereign rating on Thursday has not kept pace with the rapid economic

development of China and so does not reflect the current economic situation,

particularly the economic growth trend of the country, Xinhua News Agency

reported Friday. S&P said risks to the Chinese financial system had increased

based on changes in a number of short-term indicators, a method that "needs

further discussion," the report said, citing analysts. Although the decision by

S&P was a "misjudgment," China sees it as a "well-intentioned warning," the

report said, so the country will further strengthen its campaigns to deleverage

the financial system and prevent risks from local government debt. The rating

downgrade will not influence China's attraction as a destination for foreign

investment, particularly given China is in the process of optimizing the

investment environment, the report argued. (Xinhua News Agency)

     The U.S. Federal Reserve's decision to begin shrinking its balance sheet

will impact the interest rate differential between China and the U.S. by pushing

up U.S. bond yields, the official People's Daily reported Friday. The interest

rate differential between 10-year government securities is expected to remain

between 120 and 150 basis points, so the scale of capital outflows from China

will remain under control, the report said, citing Zhao Qingming, chief

economist with Research Institutes of China Financial Futures Exchange. The

country's foreign-exchange reserves are sufficient and its capital account is

being effectively managed, so China can actively defend against any external

shocks and maintain the independence of its monetary policy, Zhao told the

newspaper. (People's 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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