MNI China Daily Summary: Monday, August 6

     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.

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

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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