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Defying Gravity

     TOP NEWS: China is likely to set its lowest money growth target in history
next year, at around 9%, after top policymakers pledged to control the "master
valve" of total money supply, which is recognized as the origin of the surging
debt burden and the trigger of asset bubbles, China Daily reported Monday,
citing Li Yang, director of the National Institution for Finance and Development
at the Chinese Academy of Social Sciences. Li said the goal is not only the top
target for 2018 but also for the next three years, as financial risks become the
biggest medium- and long-term threat to China's economic stability. Single-digit
growth in the broad money supply, or M2, is likely during the coming year, which
will be close to its real growth this year, Li noted. (China Daily)
     POLICY: Industrial output in 2018 is expected to grow about 6%, the
Ministry of Industry and Information Technology said in a statement on its
website on Monday. Industrial output in 2017 is likely to increase 6.5% compared
with the 6% growth in 2016 -- the first annual acceleration in growth since
2010, the ministry said. China will enhance communications with countries
involved in the "One Belt, One Road" infrastructure initiative and push ahead
with international cooperation in a number of industries, including auto-making,
construction machinery, electronics and textiles, the statement noted.
     RATES: Money market rates were mixed. The seven-day repo average was last
at 2.8140%, compared with Friday's average of 2.7649%. The overnight repo
average was at 2.5298%, compared with Friday's 2.5447%.
     LIQUIDITY: The People's Bank of China skipped open-market operations on
Monday, saying that an increase in year-end fiscal spending would suffice in
hedging the impact of the CNY120 billion in maturing reverse repos the same day.
A total of CNY290 billion reverse repos are maturing this week. The PBOC
injected a total of CNY200 billion into the banking system via reverse repos
last week.
     YUAN: The yuan was stronger against the U.S. dollar on Monday after the
People's Bank of China set the fixing rate much stronger for the day. The yuan
was last at 6.5510 against the U.S. unit, the strongest since Sept. 19, with
forex market trade relatively small. The PBOC set the yuan central parity rate
at 6.5683, 0.21% stronger than Friday's 6.5821.
     BONDS: The yield on benchmark 10-year China government bonds was 3.8800%,
down from Friday's 3.8870%. 
     STOCKS: Stocks fell, with the textile and aircraft manufacturing sectors
leading losses. The benchmark Shanghai Composite Index closed down 0.50% at
3,280.46. Hong Kong's stock exchange was closed for the Christmas holiday.
     FROM THE PRESS: China should grant more rights to local governments to
issue bonds in order to increase direct funding and establish a multilevel
capital market, the China Business News reported Monday, citing Xu Zhong,
director of the People's Bank of China Research Bureau. Local governments should
be able to issue bonds according to their needs and market demand, and the
central government should relax controls on bond issuance, Xu suggested. The
current central approval system has abused the definition of municipal bonds, he
added, and restricted the issuance of local government bonds. China needs to
allow the bankruptcy of local state-owned enterprises and even local governments
to reverse market expectations that the central government will rescue them, Xu
said. (China Business News)
     The top economic priority next year is strictly controlling the growth of
local government debt, particularly the "invisible" part, China Business News
said in a commentary on Sunday. The Ministry of Finance has stressed recently
that the market and financial institutions should dispel the illusion that the
central government will bail out indebted local governments. The authorities
will curb debt growth through regulations on local governments, financial
institutions and state-owned enterprises run by the central government, the
commentary said. China will set up a market-oriented mechanism to tackle
defaults and prevent expansion of risk associated with debt, it said. Regulators
will crack down on illegal guarantees and correct illicit behavior in government
investment funds, public-private partnership projects and government purchasing
services, the commentary said. (China Business News)
     The financial sector still harbors significant risks, and the momentum of
strict regulation will not change, the official Xinhua News Agency said in a
commentary on Saturday. To prevent or mitigate risks, China needs to build a
long-lasting, effective system via deepening reforms and market-opening
measures. There is no option but to improve the financial sector's ability to
serve the real economy, the commentary said. The aim is a new culture within the
financial sector and in its relationships with the real economy and the property
market to contribute to high-quality economic growth, the commentary added.
(Xinhua News Agency)
     The neutral bias intended for monetary policy next year means that
liquidity conditions will not tighten, considering that the financial sector is
expected to shrink under strict regulation, the official People's Daily reported
Monday, citing Bank of Communications chief economist Lian Ping. The "neutral"
principle requires regulators to use multiple tools to stabilize volatility in
liquidity conditions and resolve potential crunches, Lian said, noting that
monetary policy will keep liquidity conditions at an appropriate level and
stabilize lending rates. Deleveraging efforts will continue, and expected new
regulations will target the off-balance-sheet transactions of banks, financial
technology firms and so-called zombie companies, Lian predicted. (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
[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]