MNI China Daily Summary: Monday, February 5

     TOP NEWS: Activity in China's service sector expanded in January at the

strongest pace in almost seven years after increasing new orders, according to

the latest survey of purchasing managers jointly released by Caixin and Markit.

The Caixin Service PMI rose to 54.7 in January from 53.9 in December, the

highest level since May, 2012. This marks the fourth month of the index

strengthening. Total new orders placed with Chinese service providers in January

increased by the highest pace in 32 months. The amount of outstanding orders

ended its four-month decline to stand at 50 - meaning it was unchanged from

December. The cost burden on service companies rose sharply. The rate of input

price inflation was the highest since April 2012.

     LIQUIDITY: PBOC skipped its Open Market Operations (OMO), stating on its

website that the liquidity in the banking system is "relatively high", which can

absorb the effects of maturing reverse repos and cash withdrawals, the same

wording as given the previous two trading days. There was a net drain of CNY40

billion today after same amount of reverse repos mature. A total of CNY220

billion in reverse repos will mature this week

     RATES: Interbank market rates diverged after PBOC's inaction in open-market

operation. The 7-day repo average last at 2.7190%, lower than 2.7445% Friday,

while the overnight repo average 2.5173%, up from 2.4835% yesterday. Today was

the eighth trading day that the central bank skipped its OMOs, which has drained

a net CNY1190 billion. 

     YUAN: The yuan weakened to 6.2970 against the U.S. dollar from Friday's

6.2798 closing, following today's weaker fixing. The PBOC set the yuan central

parity rate vs the U.S. dollar at 6.3019, weaker than last Friday's 6.2885.

***COMMENT: As the U.S index picks up, the yuan started to get weak in February

but at a slow pace. The yuan index against 24 basket currencies continued to

rise to almost 18 months high, which means the robust economic fundamentals of

China has also provided a strong support to the yuan's appreciation. 

     BONDS: Yield on 10-year China government bonds last traded 3.9200%, up from

Friday's close 3.9100%: Wind Information.

     STOCK: The Shanghai Composite Index closed up 0.73% to 3487.50, while Hong

Kong's Hang Seng Index was last at 32,258.23, down 1.05%.

     FROM THE PRESS: China's two-pillar macro-control framework, comprised of

monetary and macro-prudential policies, will be improved to maintain financial

stability, Financial News reported, citing officials and analysts. The monetary

policy smoothen economic cycles taking into account of CPI, while the

macro-prudential policy is pegged to broad credit and property prices. The

macro-prudential policy will focus on regulating banking institutions, including

leverage ratio, liabilities structure, and cross-border capital flow.

Non-banking institutions, including their businesses such as wealth management

products, fin-tech and shadow banking, will also be regulated, said Chen Ji,

senior researcher of Bank of Communication. 

***COMMENT: Banks need to reduce interbank liabilities and contract assets to

meet strict regulation. This will cut down the total amount of negotiable

certificates of deposit, and reduce competition in attracting general deposits.

     The internationalization of the yuan will accelerate in 2018 due to policy

support, as well as a receptive market and international environment, said the

Economic Information Daily in a front-page commentary. - Yuan payments will see

an increase in countries along the One Belt, One Road Initiative - Market

mechanisms will be further optimized as the Shanghai-London Connect and the

yuan-priced crude oil futures are expected to be launched in due course.

     Rising capital costs caused by deleveraging is hurting the real economy and

financial institutions, the 21st Century Business Herald reported. Companies

have found it harder to raise funds as banks have slowed credit provision under

strict regulation, while high rates of bond issuance constrain the effects of

direct funding. Banks are also in difficulty as the gain in money market rates

is faster than the growth of interest rates.

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

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

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