MNI China Daily Summary: Wednesday, January 6

POLICY: China should not reduce its fiscal deficit ratio too quickly as the government needs to maintain a fair amount of spending as it withdraws other temporary fiscal stimulus measures, including the CNY1-trillion special central government bond program, according to Liu Shangxi, the president of the Chinese Academy of Financial Sciences affiliated with the Ministry of Finance. In an interview with state-owned Beijing News, Liu urged a reduction in the scale of off-balance sheet local government special-purpose bonds, which are used to finance infrastructure projects, and a proportionate increase in that of central government bonds in order to improve risk controls.

LIQUIDITY: The People's Bank of China (PBOC) injected CNY10 billion via 7-day reverse repos with the rate unchanged on Wednesday. This resulted in a net drain of CNY130 billion given the maturity of CNY140 billion of reverse repos today, according to Wind Information. The operations aim to maintain the liquidity in the banking system reasonable and ample, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 1.6911% from 1.6461% for Tuesday, Wind Information showed. The overnight repo average decreased to 0.6004% from the previous 0.7114%.

YUAN: The currency strengthened to 6.4615 against the dollar from 6.4640 Tuesday. The PBOC set the dollar-yuan central parity rate lower for a second day at 6.4604, the lowest level since June 20, compared with the 6.4760 on Tuesday.

BONDS: The yield on the 10-year China Government Bond was last at 3.1700%, down from Tuesday's 3.1775%, according to Wind Information.

STOCKS: The Shanghai Composite Index gained 0.63% to 3,550.88 while the CSI300 index increased by 0.92% to 5,417.67. The Hang Seng Index increased by 0.15% to 27692.30.

FROM THE PRESS: The strengthening of the yuan may continue into H2 given the weakening dollar index and as China scales back lending, the PBOC owned Financial News reported citing CIB Research. China recent reduction in the dollar's weighting in the China Foreign Exchange Trade System (CFETS) currency basket is intended to reduce the influence of one single currency, the newspaper said citing Ming Ming, the deputy director of CITIC Securities Research Institute. China should beware of inflation as a strong yuan leads to higher asset valuations, the newspaper reported citing Qu Qiang, a researcher from the Renmin University.

China should avoid tightening its monetary policies in the short term as investment growth and consumption expansion are too slow to sustain the recovery, the Economic Information Daily, run by the official Xinhua News Agency, said in a commentary. Tightening too soon may increase the cost of corporate financing and burden businesses with credit risks, wrote the newspaper. Letting the yuan rise too quickly and by too much could also weaken the competitiveness of exporters, the newspaper commented.

China will keep the fiscal deficit ratio and the scale of local government debts at rational levels this year, Minister of Finance Liu Kun said in an interview with the People's Daily. Liu's comments suggest the government may not continue last year's approach, which included setting the fiscal deficit/GDP ratio above 3.6% and selling CNY1 trillion in special bonds. China will also ensure the macro-leverage ratio stays stable in 2021 and will continue its efforts to rein in illegal debt raisings by local governments, Liu said.