MNI China Daily Summary: Monday, May 27

     POLICY: The People's Bank of China (PBOC), China's central bank, said on

Sunday it will use open market operations and other monetary tools to ensure

"reasonable and ample liquidity" to deal with potential impact after regulators

took over a failing small domestic lender. Authorities seized the Inner

Mongolia-based Baoshang Bank after learning it posed serious credit risks, and

the China Construction Bank (CCB) has been appointed to manage its business

operations, the central bank said. The takeover by the top regulators ensures

that the Baoshang Bank maintains a national-level credit standing, the PBOC

said.

     DATA: Combined profits at China's largest industrial companies fell 3.7%

y/y in April reversing from March's 13.9%, data by the National Bureau of

Statistics (NBS) released on Monday showed. The implementation of VAT cuts

starting from April 1 prompted many business to ramp up production in March,

leading to a reduction of demand in April, and the high base in the same period

last year also dampened April profit growth, the bureau said.

     LIQUIDITY: The PBOC injected CNY80 billion via 7-day reverse repos today,

resulting in a net injection of CNY80 billion as no reverse repos mature,

according to Wind Information.

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

institutions (DR007) rose to 2.8500% from the close of 2.5469% on Friday, Wind

data showed. The overnight repo average rose to 2.3500% from 2.3421% on Friday.

     YUAN: The yuan strengthened to 6.8963 against the U.S. dollar from Friday's

close of 6.9050. The PBOC set the dollar-yuan central parity rate lower at

6.8924 today, compared with 6.8993 set last Friday.

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

3.3450%, up from the close of 3.3000% on Friday, according to Wind Information.

     STOCK: The benchmark Shanghai Composite Index rose 1.38% to 2892.38, led by

chip and software shares as well as the recovery of pork stocks. Hong Kong's

Hang Seng Index decreased 0.24% to 27,288.09.

     FROM THE PRESS: Speculators aiming to profit from shorting the yuan

exchange rate will suffer huge losses, said Securities Times in a front-page

commentary today. The newspaper said that the yuan can stabilize at a balanced

level as it is well supported by long-term economic fundamentals. The commentary

also pointed to the capacity for Chinese authorities to deal with the exchange

rate overshooting, and the tolerance for a more fluctuating yuan among the

Chinese population.

     The key tasks of the PBOC in the near term are to promote the healthy

development of the bond market and support the financing of private enterprises,

according to Chen Yulu, deputy governor of the PBOC. Speaking in a forum on

Saturday and reported by Sina Finance, Chen said the PBOC would focus on the

debt-to-equity swaps involving 185 companies, and cooperate with the security

regulator to guide more long-term funds into the capital market.

     Two symposiums on tax and fee reductions held by Chinese Premier Li Keqiang

over the last two weeks would provide a boost to market confidence, said

Securities Daily. The reductions would encourage enterprises to increase

investment in R&D, accelerate the transformation of operations and upgrade their

products, said the daily citing Zhang Yiqun, a researcher at the Society of

Public Finance. China is fully capable of resisting any economic shocks through

a series of tax cuts and reforms, because the country has a huge market,

development space and economic resilience, Zhang was reported as saying by the

newspaper.

--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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