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(U1) Tilted Higher


(U1) Uptrend Weakening


Bullard Kickstarts Reflation Unwind Theme


Fresh 2021 Lows

     TOP NEWS: China and the U.S. should restart trade talks to forestall a
deepening of the trade war between the two economies, Wang Huiyao, president of
the Center for China and Globalization (CCG), a Beijing-based think tank, told
MNI in an interview.
     TOP NEWS: The China-U.S. 2-year swap spread now sits at -13bps, having
undergone a massive 179bps fall since the start of the year, which fully
explains the collapse in the yuan. It is difficult to see the yuan's collapse
ending soon given the trends in the equity and rates markets.
     POLICY: China must take more active and targeted measures to counter
accumulated financial risks amid greater external uncertainties, the State
Council's Financial Stability and Development Committee (FSDC) said in a
statement following a recent meeting chaired by Vice Premier Liu He.
     LIQUIDITY: The People's Bank of China did not conduct open market
operations today, citing that a relatively high level of liquidity can absorb
maturing reverse repos. No reverse repos matured today. There will be no reverse
repos maturing this week after the PBOC has skipped OMOs for 12 consecutive
days. CFETS-ICAP's money-market sentiment index closed at 25 on Friday, down
from 27 last Thursday.
     MONEY MARKET RATES: The benchmark 7-day deposit repo average fell to
2.3515% on Monday from 2.3806% on Friday; the overnight average decreased to
1.7981% from 1.8166% on Friday: Wind Information.
     YUAN: The yuan strengthened to 6.8200 against the U.S. dollar on Monday
from Friday's 6.8430 closing, despite today's weaker fixing. The PBOC set the
yuan central parity rate at 6.8513, weaker than Friday's 6.8322, following the
depreciating trend over the past two months. USDCNH is trading close to its
daily high at 6.8483, but price action has been very muted and the pair remains
a way off Friday's pre-PBOC announcement highs.
     BONDS: The yield on the benchmark 10-year China Government Bond was last at
3.4600%, remaining unchanged from last Friday, according to Wind Information.
     STOCKS: Shares in Shanghai declined sharply, weighed down by the
agricultural and pharmaceutical sectors. The Shanghai Composite Index closed
1.29% lower at 2,705.16, at one point falling below the 2,700 level in the
afternoon. Hong Kong's Hang Seng Index increased 0.39% to 27,785.16. Chinese
stocks remain under pressure as the recent rally in the yuan fails to translate
into equity gains. This highlights the risks facing policymakers that we have
noted in recent weeks, namely that they may be forced to choose between
supporting the currency and supporting the equity market.
     FROM THE PRESS: China has been "rational and restrained" in its
countermeasures against the U.S.'s "blackmail," Xinhua News Agency said in a
commentary, after China announced retaliatory tariffs ranging from 5% to 25% on
U.S. goods worth USD60 billion on Friday. Differentiated tariff rates were taken
out of consideration for the interests of both Chinese people and the global
industrial chain, Xinhua said. China will not rush to compete with U.S. numbers,
but it is ready to take "quantitative and qualitative measures" against the
U.S.'s next move, Xinhua added. China welcomes negotiations with the U.S. on the
basis of mutual respect, equality and benefit, Xinhua said.
     The PBOC's maximum level of tolerance for yuan depreciation may be 7.0, the
Economic Observer reported, after the PBOC announced a 20% reverse requirement
ratio on the trading of foreign-exchange forward contracts. However, the
authorities would like the market to take a dominant role in deciding the yuan's
exchange rate, the newspaper said, citing Guan Tao, former director-general of
Balance of Payments at the State Administration of Foreign Exchange (SAFE).
Regulating and stabilizing market expectations are currently key for the PBOC to
ensure there is enough room for policy implementation, the newspaper said,
citing a source close to the PBOC.
     China should remain rational and calm in the face of credit defaults, as
they are an inevitable part of the deleveraging process, China Securities
Journal stated, citing Sheng Songcheng, counsellor to the PBOC. Bank loans
cannot alone satisfy enterprises' demand for financing, and other channels have
not been used efficiently, Sheng said. Shadow banking has both positive and
negative aspects against this background -- while it serves the financial
requirements of the real economy, it also poses potential risks, Sheng added,
according to the newspaper. China should funnel funds into the real economy and
enhance the monetary policy transmission mechanism to help strike a balance
between these impacts, Sheng said.
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