MNI China Daily Summary: Monday, August 21

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

reverse repos and CNY80 billion in 14-day reverse repos via open-market

operations on Monday, Wind Information, a Shanghai-based financial data

provider, said. This resulted in a net drain of CNY50 billion for the day, as a

total of CNY230 billion in reverse repos matured. A total of CNY750 billion of

reverse repos will mature this week. The PBOC injected a net CNY110 billion in

liquidity via reverse repos last week. The CFETS-ICAP money-market sentiment

index ended at 50 on Friday -- down from 51 at Thursday's close -- as seasonal

factors, including tax and required reserve deposit payments, faded. The lower

the reading, the better the liquidity conditions in the interbank market.

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

at 2.8628%, higher than Friday's average of 2.8025%. The overnight repo average

was at 2.8554%, lower than Friday's 2.8627%.

     YUAN: The yuan strengthened against the U.S. dollar after the People's Bank

of China set the fixing rate stronger for the day. The yuan was last at 6.6714

against the U.S. unit, compared with the official closing price of 6.6785 on

Friday. The PBOC set the yuan central parity rate at 6.6709, 0.05% stronger than

Friday's 6.6744.

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

3.5979%, up from the previous close of 3.5774%.

     STOCKS: Stocks rose, with the real estate and coal sectors leading gains.

The benchmark Shanghai Composite Index closed up 0.56% at 3,286.91. Hong Kong's

Hang Seng Index was 0.49% higher at 27,180.81.

     FROM THE PRESS: Entrusted product transactions are recovering as the

average yields of most bond funds have exceeded those of bank deposits, and even

some wealth management products (WMPs), after a nine-month correction in the

bond market, the China Business News reported Sunday. Small and medium-size

banks are actively investing in entrusted products to cover their costs, the

report said. In addition, under the government's financial deleveraging

campaign, the pressure on banks' WMPs and complicated structural products is

increasing, providing an opportunity for products offered by non-bank financial

institutions, the report said. NBFIs are eager to share the "big cake" of funds

now invested in bank WMPs, worth around CNY30 trillion, the report said. (China

Business News)

     Yuan depreciation expectations have weakened, but have not completely

reversed, the People's Daily reported Monday, noting it is normal for the yuan

exchange rate to experience two-way fluctuations. Considering the U.S. Federal

Reserve is expected to continue to hike rates and start shrinking its balance

sheet, the U.S dollar will not continue to fall so the market should not be

overly optimistic about the impact of the external environment on the yuan

exchange rate, the report warned, citing analysts. Given the market is playing a

more decisive role in determining changes in the yuan exchange rate and Chinese

economic fundamentals are providing strong support, there is reason for the yuan

to appreciate further, the report said. The market should have a clear

understanding of the trend of the yuan exchange rate and not be confused by

irrational opinions, the report added. (People's Daily)

     The financial sector continues to face risks from regulatory arbitrage,

problematic connections between elements of the financial system and the rigid

payment structure of trust products, the Financial News, a journal run by the

People's Bank of China, reported Monday, citing Yin Yong, vice president of the

Bank of China. Authorities should further clarify transaction rules,

particularly the requirements for qualified market participants, and improve

transparency, Yin said. Regulatory arbitrage needs to be fixed and violators

punished as regulatory coordination is enhanced, Yin argued. (Financial News)

     Bank transactions to add leverage and shun regulation must be dealt with to

clean up the "mess" in the interbank market, the People's Daily commented

Monday. Although the normal functioning of the financial sector is recovering as

regulators enhance their controls, it is still possible that financial entities

will resume irrational transactions, the commentary noted. In the near future,

the deleveraging campaign will prioritize state-owned companies, the commentary

said, adding that risks from local government debt should also be resolved in a

positive way. The deleveraging in the financial sector should support the real

economy, but it must be done in an orderly and gradual way, with a precondition

of maintaining market stability. (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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