MNI China Daily Summary: Monday, July 1

EXCLUSIVE: Central government fiscal stimulus will be essential for dealing with China’s current economic situation, but in the long term the country will need to look to equity-funded tech innovation and manufacturing upgrades to drive growth, a prominent economist told MNI, also predicting the central bank would reduce reserve requirement ratios by 25 basis points later this year.

EXCLUSIVE: China needs to reduce industrial subsidies if it is to boost productivity and achieve average annual growth of 3.5% over the next five years, likely the most it can manage given inefficiency of resource allocation and overcapacity in major sectors, a prominent economist told MNI in an interview.

POLICY: The People’s Bank of China (PBOC) will borrow treasury bonds in the secondary market, according to a statement on the PBOC’s website. The PBOC “has decided to conduct treasury bond borrowing operations with selected primary dealers of open market operations in the near future” in a bid to “maintain the stable operation of the bond market” the statement said, noting the decision was made “based on a prudent observation and assessment of the current market situation”.

DATA: China's Caixin manufacturing PMI registered 51.8 in June, up 0.1 points from May, marking eight consecutive months above the 50 mark and hitting the highest level since June 2021, the financial publisher said.

LIQUIDITY: The PBOC conducted CNY2 billion via 7-day reverse repo, with rates unchanged at 1.80%. The operation led to a net drain of CNY48 after offsetting the CNY50 billion maturity today, according to Wind Information.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) fell to 1.8009% from 2.1664%, Wind Information showed. The overnight repo average decreased to 1.7359% from 1.9146%.

YUAN: The currency weakened to 7.2684 against the dollar from 7.2659 on Friday. The PBOC set the dollar-yuan central parity rate lower at 7.1265, compared with 7.1268 set on Friday. The fixing was estimated at 7.2566 by Bloomberg survey today.

BONDS: The yield on 10-year China Government Bonds was last at 2.2046%, down from the previous close of 2.2200%, according to chinamoney.com.cn.

STOCKS: The Shanghai Composite Index rose 0.92% to 2,994.73 while the CSI300 index gained 0.48% to 3,478.18. The Hang Seng Index edged up 0.01% to 17,718.61.

FROM THE PRESS: China is planning a series of measures to further encourage foreign investment, including reducing access restrictions and launching a new round of pilot measures to expand the opening up of the service industry, China Securities Journal reported. Opening-up measures could be introduced in the medical and telecom sectors, said Xiao Benhua, deputy director of the Free Trade Zone Research Institute of Shanghai Lixin University. The National Development and Reform Commission is also accelerating an updated catalogue of industries encouraging foreign investment, with advanced manufacturing, modern services, high-tech, energy conservation and environmental protection to be highlighted, the newspaper said.

The government should significantly increase countercyclical policies and boost investment to drive up orders and production following June’s PMI reading of 49.5, according to Zhang Liqun, an analyst at the China Federation of Logistics and Purchasing. Wang Qing, chief macro analyst of Golden Credit Rating, said the economic recovery was not solid given the real estate sector's ongoing adjustment. Authorities need to take monetary policy measures in Q3, and boost support for the property sector in H2, Wang added. (Source: Yicai)

China air passenger volume will grow 7.0% y/y this July and August, according to estimates from Flight Steward, a booking service. Passenger flights are expected to reach 994,000, up 4.1% over 2023 and 6.1% over 2019. However, average domestic economy class ticket prices will hit 1,010 yuan, down 3% y/y. Inbound passengers will rise 100% y/y, with travellers from the 14 countries recently given China visa-free access increasing 150% y/y. (Source: Yicai)