MNI China Daily Summary: Monday, August 22

POLICY: China’s lending institutions lowered the reference lending rate for mortgage loans in a bid to stimulate the property sector which has dragged down overall credit demand, and further rates cuts are expected to shore up the wider economy, analysts said. As anticipated in MNI's State of Play (Analysts See PBOC Point To Lower August LPR), transmitted 18 Aug., the five-year Loan Prime Rate (LPR) was trimmed 15bp to 4.30% on Monday, following the medium-term Lending Facility cut by the People's Bank of China early last week. The smaller 5bps 1-year LPR cut was below market consensus, which forecast a 10bps reduction.

TOP NEWS: China’s reference lending rates were lowered on Monday, according to a statement on the People's Bank of China (PBOC) website, with the move coming after the central bank cut key policy rates last week. The one-year Loan Prime Rate was reduced by 5bp to 3.65%, while the five-year Loan Prime Rate fixed 15bp lower, at 4.30%. The steps were slightly out of line with the wider consensus, which looked for at least 10bp cuts to both rates, although there was a clear risk of a larger step for the 5-year benchmark.

LIQUIDITY: The PBOC injected CNY2 billion via 7-day reverse repos with the rate unchanged at 2.0%. This keeps the liquidity unchanged after offsetting the maturity of CNY2 billion repos today, according to Wind Information. The operation aims to keep liquidity reasonable and ample, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) decreased to 1.3807% from 1.4391% on Friday, Wind Information showed. The overnight repo average fell to 1.1380% from the previous 1.2065%.

YUAN: The currency weakened to 6.8384 against the dollar from 6.8088 on Friday. The PBOC set the dollar-yuan central parity rate higher at 6.8198, compared with 6.8065 set on Friday.

BONDS: The yield on 10-year China Government Bond was last at 2.6240%, down from the previous close of 2.6250%, according to Wind Information.

STOCKS: The Shanghai Composite Index rose 0.61% to 3,277.79 while the CSI300 index gained 0.73% to 4,181.40. Hang Seng Index edged down 0.59% to 19,656.98.

FROM THE PRESS: International investors are returning to the Chinese bond market, with last week's surprise PBOC rate cut fueling bullish sentiment, Yicai.com reported. There was a net inflow of USD5.6 billion into Chinese bonds on the part of international investors during the first half of August, reversing the bulk of the net outflow of ~USD6.9 billion observed in the prior six months, the newspaper said. Many traders believe that yields will move lower based on expectations for slower economic growth and further PBOC easing, the newspaper said, citing analysts.

The pressure stemming from banks’ non-performing loans will continue to increase as economic headwinds gradually feed through to the financial sector, Yicai.com reported, citing Shang Fulin, former chairman of the China Banking Regulatory Commission, speaking at a weekend forum. The policy implemented to defer loan repayment for struggling enterprises may delay the risk exposure of some “zombie” companies and weaken economic vitality, Shang said. Banking regulators should continue to fully expose and increase the disposal of non-performing assets, emphasising the expansion of capital replenishment for small and medium-sized banks to enhance their risk resistance capabilities, the newspaper wrote, citing Shang.

China’s Ministry of Housing and Urban-Rural Development said it will support the construction and delivery of overdue unfinished housing projects through special loans from policy banks, the Securities Times reported on Saturday. Following a wave of mortgage boycotts across the country last month, it is expected that such special loans will leverage bank loans for housing developers, ensuring the delivery and maintaining social stability, the newspaper said, without specifying further details.