MNI China Daily Summary: Monday, May 20

     POLICY: China's central bank is confident and capable of maintaining the

stability of the yuan exchange rate at a balanced level, according to Pan

Gongsheng, deputy governor of the People's Bank of China (PBOC). In a statement

on the PBOC website posted late on Sunday, Pan said that foreign capital inflows

have increased and forex reserves have risen steadily since the beginning of

this year. Pan, who is also the director of the State Administration of Foreign

Exchange (SAFE), said healthy macroeconomic fundamentals, rapid credit growth

and moderate monetary and financial conditions would provide strong support for

the forex market and the yuan.

     DATA: Chinese banks net sold more foreign exchange for their clients last

month, indicating accelerated capital outflow as the yuan weakened. Banks sold

net CNY53.1 billion equivalent FX on behalf of clients in April, more than the

CNY16.6 billion in March, according to data released by SAFE today.

     LIQUIDITY: The PBOC skipped open market operations (OMOs) for the eighth

trading day, leaving liquidity unchanged as no reverse repos matured, according

to Wind Information. Total liquidity in the banking system is at a reasonable

and ample level, according to the PBOC.

     RATE: The 7-day weighted average interbank repo rate for depository

institutions (DR007) rose to 2.8000% from the close of 2.5457% on Friday, Wind

data showed. The overnight repo average rose to 2.6000% from 2.1554% on Friday.

     YUAN: The yuan weakened to 6.9141 against the U.S. dollar from Friday's

close of 6.9138. The PBOC set the dollar-yuan central parity rate higher for an

eighth trading day at 6.8988, compared with 6.8859 set last Friday.

     YUAN: Any depreciation of the yuan below the psychologically important

level of 7 yuan to the dollar would dampen market confidence, according to Sheng

Songcheng, the former director of the Survey and Statistics Division of the

PBOC. In an article published today in the China Business News, Sheng said that

a sharp fall in the yuan would increase capital outflow pressure and encourage

the U.S. to escalate trade frictions. Chinese exporters cannot keep relying on

low prices to gain a competitive advantage, and a weakened yuan may not actively

improve product quality, Sheng was reported as saying.

     YUAN: Defending the yuan exchange rate against further depreciation is

China's top priority, as China's financial market is more vulnerable to the

U.S.'s verbal threats, the Global Times, owned by the official People's Daily,

said in an op-ed late Sunday. Further depreciation of yuan will lead to drop in

asset prices, which encourages capital outflows and dents China's foreign

reserves, the newspaper said, noting that such a vicious cycle will have a broad

impact on China's financial and asset market, as well as the real economy.

     BONDS: The yield on the 10-year China Government Bond (CGB) was last at

3.2650%, up from the close of 3.2600% on Friday, according to Wind Information.

     STOCK: The benchmark Shanghai Composite Index fell 0.41% to 2870.60. Hong

Kong's Hang Seng Index decreased 0.57% to 27,787.61.

     FROM THE PRESS: The escalation of the China-U.S. trade conflicts adds

short-term pressure to the economy, but the impact on exports may be limited as

China has diversified its export markets, Xinhua News Agency said late Sunday

citing Liu Shijin, a member of the PBOC's monetary policy committee. Waging a

trade war cannot solve any problems even as it afflicts damages to both

countries and the global economy, Liu was cited as saying.

     The PBOC's Q1 monetary report released on Friday has re-emphasized the

importance of structural de-leverage amid the increasing macro leverage ratio

for the quarter, according to Ming Ming, chief analyst at CITIC Securities in a

commentary published today. Ming said the PBOC monetary report emphasized that

structural de-leveraging should be coordinated with monetary policy which

considered credit growth, economic growth and inflation. The PBOC also

reiterated its view that there is still downward pressure on the domestic

economy, and Ming said the report paid more attention to external headwinds

including the slowing global economy and trade friction.

     Chinese Communist Party's anti-corruption watchdog said it is investigating

Liu Shiyu, the former chairman of the China Securities Regulatory Commission,

for "violating laws and disciplines". Liu, now a senior official at the All

China Federation of Supply and Marketing Cooperatives, turned himself in and is

cooperating with the probe, according to a brief statement on the website of the

Central Commission for Discipline Inspection.

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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