MNI China Daily Summary: Monday, July 2

     TOP NEWS: A recent softening in China's rhetoric regarding its ongoing

trade dispute with the U.S. does not signify a meaningful de-escalation in

tensions between the world's two largest economies, a Ministry of Commerce

researcher told MNI. Rather, China remains ready for a trade war and is prepared

to take concrete actions to defend its interests. 

     TOP NEWS: The recent slide in the Chinese currency yuan has been mostly due

to weakening economic fundamentals and market sentiment, and the People's Bank

of China (PBOC) has seen no need to intervene, Zhang Ming, a senior fellow at

the Institute of World Economics and Politics under the Chinese Academy of

Social Sciences, told MNI. "The central bank is taking advantage of the

opportunity to let the effective exchange rate readjust and buffer against the

impact on exports of the previous sharp appreciation against the currencies

basket," said Zhang.

     YUAN: USDCNH has risen today despite the PBOC setting a slightly stronger

fix. The yuan has underperformed even among a weakening in Asian FX generally

over the past two weeks, and has even underperformed EM FX more generally.

Chinese government has announced some market friendly policies that may be aimed

at preventing further yuan weakness. However, fundamentally the divergence in

monetary policies between China and the US, together with the looming threat of

a trade war, will prevent a meaningful yuan rally.

     YUAN: The CFETS Weekly RMB Index, which measures the yuan relative to a

basket of 24 currencies, fell by 1.77% on June 29 from the previous week to

95.66, the lowest since the week of Jan 19 this year. The 1.77% slump was the

biggest drop since the index was created on December 11, 2015.

     POLICY: China's monetary policy is becoming increasingly loose despite the

PBOC's official 'neutral and prudent' stance. Beijing is finding it increasingly

difficult to wean itself off of easy credit as a policy tool and this is being

reflected in the ongoing collapse of interest rate swaps. The 1-year swap now

sits at just 3.01%, just 40bps above that of the US, making yuan shorts

increasingly attractive.

     LIQUIDITY: The PBOC skipped its open market operations on Monday, stating

on its website that a relatively high level of liquidity can absorb maturing

reverse repos. That resulted in a net drain of CNY20 billion, as CNY20 billion

in reverse repos matured today, according to the PBOC. CFETS-ICAP's money-market

sentiment index closed at 39 on Friday, up from 33 on Thursday.

     MONEY MARKET RATES: Benchmark 7-day deposit repo average fell to 2.6889% on

Monday from 3.0106% on Friday; Overnight average decreased to 2.4704% from

2.6476% on Thursday: Wind Information.

     BONDS: The yield on benchmark 10-year China Government Bond was last at

3.4725%, falling from 3.4800 of the previous close, according to Wind

Information.

     STOCKS: Shares declined significantly in Shanghai after a firm rebound last

Friday. Uncertainty on trade policy as well as concerns that retaliation could

intensify to the point that global economic growth is negatively affected, have

weighed on investor sentiment. Shanghai Composite Index closed 2.52% lower at

2775.56, making it the lowest in the past two years. Hong Kong Stock Exchange

closes today due to Hong Kong Special Administrative Region Establishment Day.

     FROM THE PRESS: The yuan is not likely to depreciate continuously in the

second half of the year, China News Service reported, citing experts, after the

yuan central parity rate weakened 206 basis points to 6.6166 as of last Friday.

China will likely not reform its exchange rate formation mechanism, and the US

dollar index will remain strong in the second half of the year, said Xie Yaxuan,

chief macro analyst of Merchants Securities, according to the newspaper. The

yuan will fluctuate between 6.25 and 6.75 against the US dollar, Xie predicted.

There are still some uncertainties on the yuan as the trade escalation evolves,

and the US dollar's posture against the emerging currencies may change; however,

the yuan is very unlikely to drop below 7.0 within the year, said Zhang Ming,

analyst of Chinese Academy of Social Science, according to the newspaper.

     Yi Gang, governor of the PBOC has proposed a policy package to increase

bank lending while reducing lending costs to small and micro-sized firms,

reported Xinhua News Agency. Small and micro-sized firms are the new driving

force of China's economy, which boost employment and stimulate innovation, Yi

said. The PBOC will raise the cap of relending and rediscounting by CNY150

billion to support small firms and agriculture, Yi noted. The key objective of

the policy package is to increase the number of enterprises that can acquire

bank loans, and to enhance the financing structure, Yi added.

     The resilience of China's economy will likely stabilize GDP growth at 6.6%

this year, reported Economic Information Daily, a Xinhua newspaper. It is

necessary to be cautious of potential negative effects, especially from trade

tensions between China and the U.S., the newspaper noted. Real estate investment

will most likely slow down as regulatory policies were tightened in the first

half of the year. However, the PBOC's looser monetary policy will ease credit

conditions and the policies to expand domestic demand will drive the growth in

sales of consumer products, said the newspaper.

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

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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