MNI China Daily Summary: Friday, September 29

     TOPS NEWS: The Ministry of Commerce announced the government will close all

North Korean firms operating in China within 120 days of Sept. 11, the day the

United Nations Security Council adopted the latest round of sanctions against

Pyongyang, the South China Morning Post reported Thursday. In the notice, the

ministry said all joint ventures with North Korean companies in China as well as

joint ventures set up overseas by the two countries or the citizens of the two

countries would be closed, but companies not within the sanctions parameters or

those approved by the U.N. Security Council would be exempt, according to the

newspaper.

     TOP NEWS: The seemingly flexible stance and tolerance of the People's Bank

of China regarding the yuan exchange rate has been challenged over the past

month as the yuan has fluctuated in a wider trading band, forcing the central

bank to re-evaluate how far from shore it will allow the yuan to float before

throwing in a lifesaver. The unprecedented volatility of the yuan in the past

month -- from a big surge to a sharp slump -- could indicate that the PBOC has

an increased tolerance for a wider trading band of the currency. More important,

the central bank seems to have unveiled to the market its new dynamic

policy-making process for the yuan exchange rate -- in other words, the PBOC is

no longer afraid to let the yuan float on its own, at least for short periods.

     POLICY: The Ministry of Commerce said Friday that China does not force

foreign investors to transfer technology to form joint ventures in China. The

ministry made the comment at a press conference announcing the release of its

"Report on the Latest Development in Intellectual Property Rights Protection and

the Business Environment in China," compiled by the Office of the National

Leading Group on the Fight Against IPR Infringement and Counterfeiting. China

would implement strict intellectual property rights protection, the ministry

said. China opposes "measures by individual countries to adopt unilateralism and

protectionism," and will continue to work to build an equal, open and

transparent business environment, and to protect the international multilateral

trading system, officials from several government bodies stressed at the press

conference.

     POLICY: This month, China's so-called "Black Metal Complex" -- markets for

steel, iron ore, coal and any businesses related to the production and

consumption of ferrous metals -- agonized over a major announcement from the

increasingly powerful Ministry of Environmental Protection. Dubbed "26+2," the

latest order gave tough-worded warnings to officials in Beijing, Tianjin, and 26

other cities in the surrounding provinces: curb heavy-polluting industries and

keep the air clean, or they face severe discipline. In the winter heating months

ahead, every city's pollution indicators will be constantly monitored.

     DATA: China's current account surplus surged to $50.9 billion (CNY348.8

billion) in the second quarter from $18.4 billion in the first quarter, the

State Administration of Foreign Exchange (SAFE) announced Thursday. SAFE said

the capital and financial accounts, which include net error and omission

numbers, saw a deficit of $0.4 billion (CNY3.1 billion) in the second quarter,

significantly shrinking from the $39.3 billion surplus during the January to

March period. For the first half of this year, the current account surplus was

$69.3 billion (CNY475.4 billion) while the capital and financial account surplus

was $38.9 billion (CNY267.6 billion), SAFE said.

     RATES: Money market rates were mixed on Friday after the PBOC drained a net

CNY160 billion via open-market operations. The seven-day repo average was last

at 2.9794%, up from Thursday's average of 2.9673%. The overnight repo average

was at 2.7722%, compared with Thursday's 2.9320%.

     YUAN: The yuan strengthened against the U.S. dollar Friday after the

People's Bank of China set a weaker daily fixing. The yuan was last at 6.6666

against the U.S. unit, rising 0.05% compared with the official closing price of

6.6699 on Thursday. The People's Bank of China set the yuan central parity rate

against the U.S. dollar at 6.6369 on Friday, modestly weaker than Thursday's

6.6285.

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

3.5879%, up from the previous close of 3.5635%, according to Wind, a financial

data provider.

     STOCKS: Stocks rose, led higher by property agency stocks and the telecoms

service sector. The benchmark Shanghai Composite Index closed up 0.28% at

3,348.94. Hong Kong's Hang Seng Index was 0.27% higher at 27,496.11.

     FROM THE PRESS: The Chinese bond market is entering a "slow bull" period,

the Financial News, a newspaper managed by the People's Bank of China, said

Friday. As the State Council meeting announced Wednesday, targeted cuts in

banks' required reserve ratios would boost financial institutions' support for

micro-enterprises, and there is relatively high chance the PBOC will implement

this policy within a month, the newspaper said. The targeted reserve ratio cut

could inject new energy into the money and bond markets. But the report noted

that the signaling of a coming targeted RRR cut does not mean a change in the

direction of China's prudent and neutral monetary policy or the beginning of a

"loose period" for liquidity. As the third quarter is ending, many financial

institutions are positive about the bond market outlook in the fourth quarter,

so the State Council's announcement should further strengthens the market's

optimism, the report said. (Financial News)

     The yuan exchange rate will continue a "two-way" fluctuation in the future,

the China Securities Journal reported Friday. The weakening of the yuan in the

last several weeks has been due mainly to the rebound of the dollar index, the

People's Bank of China's new foreign-exchange policy, and an increase in Chinese

companies' need to purchase foreign currencies, the report said. The yuan

exchange rate against the U.S. dollar will be driven by the two countries'

economic fundamentals, analysts were cited as saying. Given yuan depreciation

expectations have weakened, the Chinese currency could remain relatively strong

for some time, with its room to weaken limited, according to the newspaper.

(China Securities Journal)

     The Ministry of Commerce confirmed Thursday that it is compiling a

"blacklist" of rules to prevent irrational overseas investment by Chinese

companies, listing punishments for breaking the rules. The ministry is working

with related government bodies on the scheme, and China is "determined" to stop

irrational outbound investment and strengthen examination of the authenticity of

companies' outbound investments, according to ministry spokesman Gao Feng.

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

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

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