MNI China Daily Summary: Monday, August 28

     TOPS NEWS: City commercial banks in China are struggling to survive the

rising costs of wholesale funding and a reduction in deposits from business

customers, resulting from the government's continued deleveraging campaign and

tightened financial regulations. In the eyes of some city commercial bank heads,

the deleveraging campaign and tighter regulations have had a silver lining,

forcing the banks to find alternative ways to raise funds.

     DATA: Green bond issuance rose 33.6% year-on-year to $11.52 billion in the

first half of this year, accounting for 20.6% of the global green bond market,

China Central Depository and Clearing (CCDC) said in a report on Monday.

Although the willingness to issue green bonds fell in the first quarter due to

higher funding costs, volume rebounded to $7.85 billion in the second quarter,

from $3.68 billion in the first quarter, the CCDC said. Banks issued 38% of

total green bonds in the first six months, dropping from 87% during the same

period last year, while non-banking institutions also accounted for 38% of the

total. Green bonds with a duration of three years and five years accounted for

the majority of issuances, comprising 42.3% and 35.8% of the total,

respectively.

     DATA: The combined profits of Chinese industrial companies rose 16.5% y/y

in July to CNY612.67 billion, a slowdown from June's 19.9% growth, the National

Bureau of Statistics reported Sunday. For the first seven months of this year,

total profits rose 21.2% y/y to CNY4.248 trillion. That growth rate was 0.8

percentage point lower than the 22.0% gain in the first half this year. The NBS

attributed the fall to abnormally hot weather affecting production.

     RATES: Money market rates were lower on Monday after the PBOC drained a net

CNY100 billion via its open-market operations. The seven-day repo average was

last at 2.8671%, much lower than Friday's average of 2.9591%. The overnight repo

average was at 2.8508%, compared with Friday's 2.8525%.

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

of China set a stronger daily fixing. The yuan was last at 6.6402 against the

U.S. unit, rising 0.12% compared with the official closing price of 6.6645 on

Friday. The People's Bank of China set the yuan central parity rate against the

U.S. dollar at 6.6353 Monday, stronger than Friday's 6.6579.

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

3.6078%, up from the previous close of 3.6013%, according to Wind, a financial

data provider.

     STOCKS: Stocks rose, led higher by the securities, agricultural and

computer software sectors. The benchmark Shanghai Composite Index closed up

0.93% at 3,362.65. Hong Kong's Hang Seng Index was 0.02% higher at 27,852.84.

     FROM THE PRESS: Xu Zhong, head of the research department at the People's

Bank of China, wrote in a blog commentary published Sunday that the disorder in

China's financial sector in fact reflects problems in the real economy and the

whole financial system. Xu said the government's excessive intervention in the

market is a problem, adding that China lacks a system relying on personal credit

instead of the current situation relying on collective credit. "Invisible"

government insurance on wealth management products still exists, Xu said,

leading to overly favorable ratings for some companies. Financial institutions'

staff salaries, their status within the industry, and the economic tasks

allocated to them by the government are all linked directly to their size,

causing excessive emphasis on the pursuit of size by financial institutions, Xu

said. He also stressed that the existence of zombie companies was partly due to

the continuing financial support of financial institutions, which are trying to

hide bad loans. At the same time, local governments and financial regulators are

also trying to hide bad loans because revelations of their existence would

highlight their lack of proper management and regulatory oversight, Xu said.

     Chinese Premier Li Keqiang has stressed the need for China to upgrade its

manufacturing sector, the People's Daily reported Monday. During a Friday

meeting with officials and companies on economic restructuring to improve the

sector, Li said manufacturing is the foundation for economic development and

China's economic transformation. There needs to be a new industrialization that

creates new, high-quality "made in China" products, he said. The problem is that

while China's manufacturing sector is large, it is not strong enough, so the

task of upgrading the sector is urgent, Li said. China needs to stick to its

"Made In China 2025" plan to boost targeted manufacturing sectors, eliminate

out-of-date economic segments and facilitate the move of Chinese manufacturing

to produce "high-end" products. He stressed that innovation is necessary for the

upgrading and that the government needs to strengthen supervision to protect

intellectual property rights protection while helping reduce financing pressure

on companies. (People's Daily)

     China is speeding up deleveraging of state-owned enterprises (SOEs), the

Economic Information Daily, a newspaper under the official Xinhua News Agency,

said Monday in a front-page report. The newspaper stressed the Chinese

government is "taking real measures" in its SOE reform plan. The State-owned

Assets Supervision and Administration Commission of the State Council, which

manages SOEs, said that it would reduce their liability ratios, the newspaper

said. SOEs will control the size of their debt and reduce leverage, and

debt-to-equity swaps for SOEs will accelerate, with several SOEs already signing

debt-to-equity agreements with banks, according to the newspaper. The report

stressed that high leverage is still a serious problem for SOEs, even though

their asset-to-liability ratio dropped by 0.2 percentage point year-to-date in

July compared with the beginning of this year. (Economic Information Daily)

     Chinese companies' outbound investment needs to be stabilized to ensure the

development of the Chinese economy, the official People's Daily said Monday. The

government's recent clampdown on unreasonable outbound investment is not aimed

at curtailing an increase of outbound investment, but rather to control risks

and prevent financial bubbles, the newspaper said. China's national strategy to

encourage companies to "go out" has not changed. Zhang Hanya, researcher at the

investment research department of the National Development and Reform

Commission, told the newspaper that the 44.3% y/y drop in outbound investment

from January to July was partly due to a high base in the same period last year.

Many Chinese companies lack deep knowledge of local policies and laws overseas,

affecting their profits and leading to the loss of Chinese foreign exchange, he

said. China is encouraging Chinese companies to invest in "One Belt, One Road"

infrastructure projects, so the overall outbound investment volume will

stabilize, he said. (People's Daily)

--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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