MNI China Daily Summary: Monday, September 3

     TOP NEWS: The yuan is set to rally for the rest of this year, as the

central bank pushes the exchange rate back towards its preferred level against a

currency basket, researchers and official advisors have told MNI. "The

reintroduction of the counter-cyclical factor into the yuan's fixing formula was

maybe partly due to the sharp decline of the CFETS index," Zhang Ming, senior

fellow at the Institute of World Economics and Politics under the Chinese

Academy of Social Sciences, said in his latest note.

     YUAN: The yuan's trade-weighted basket rose after two consecutive weeks of

decline, according to People's Bank of China (PBOC data) Monday. The CFETS

Weekly RMB Index, which measures the yuan versus a basket of 24 currencies, rose

by 0.33% on Friday from the previous week, registering at 93.08. The index is

down 1.87% from its end-2017 reading of 94.85 on Dec 29, according to MNI's

calculations.

     YUAN: The yuan strengthened to 6.8293 against the U.S. dollar from Friday's

closing of 6.8299. Earlier today, the PBOC set the yuan central parity rate at

6.8347, weaker than Friday's 6.8246 rate. It was the fourth weaker fixing in a

row.

     YUAN: EURCNH continues to struggle to confirm a break of the 8.0 level.

Euro weakness against the dollar on Friday saw the pair drop below this level

yet again as the short-term trend turns negative. Success or failure at

overcoming 8.0 will likely have implications for European and emerging market FX

more broadly. Based on rate market trends, a further rally in EURCNH is facing

fundamental hurdles.

     YUAN: USDCNH is trading at its daily lows of 6.8370 as of 14:27 Beijing

time, as bears look to recover the breakout above short-term down trendline

resistance (now support) from the August 15 high. The pair is at a technical

crossroads where a close below 6.8275 would be bearish while a close above

6.8400 would be bullish. Interest rate swaps are trading in the middle of their

recent range, with the 2-year at 2.91%, 8bps outside the US. Price action is

capped between the 55-dma above and the 21-dma below, with the convergence of

the two moving averages suggesting a significant move is on the way. From the

look of the equity market, risks are to the downside as the CSI 300 remains

under pressure despite being off its lows at 3310. However, a strong close in

stocks would improve the outlook for all Chinese financial assets, given the

high correlations at present.

     DATA: China's Caixin Manufacturing PMI eased to a 14-month low 50.6 in

August, down from 50.8 in July. New export orders increased, as weaker domestic

demand drove the headline decline.

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

its website that relatively high liquidity in the market should offset the

impact of government bond issuance. The PBOC's inaction resulted in no change in

liquidity, as no reverse repos matured today, according to Wind Information. It

is the ninth consecutive day in which the PBOC has skipped OMO. No reverse repos

will mature this week, while CNY176.5 billion in one-year MLF will come due.

CFETS-ICAP's money-market sentiment index closed at 28 on Friday, down from 31

on Thursday.

     MONEY MARKET RATES: The benchmark 7-day deposit repo average dropped to

2.5765% from 2.6097% on Friday; the overnight average decreased to 2.2567% from

2.2584%: Wind Information.

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

3.6000%, up from the previous close of 3.5850%, according to Wind Information.

     STOCKS: The Shanghai Composite Index closed 0.17% lower at 2,720.73. Hong

Kong's Hang Seng Index declined 0.8% to close at 27,666.13.

     FROM THE PRESS: Issuance of local government bonds hit its highest in over

two years last month, Shanghai Securities News reported. CNY882.97 billion in

local government bonds were issued in August, the most since July 2016. Total

net financing reached CNY765.485 billion, the highest since September 2016, the

newspaper said, citing data from Wind Information. Local government

infrastructure investment also accelerated in August, with railway construction

projects in Changchun and Suzhou being approved, and investment reaching

CNY173.732 billion in total. Details of infrastructure projects in other cities

and provinces will be made public by year-end, the newspaper noted.

     The PBOC is expected to use quantitative monetary policies, such as

adjusting its open market operations (OMO) and reserve requirement ratio (RRR),

to maintain liquidity at a stable level, the Securities Daily reported. There is

greater uncertainty over the liquidity outlook in September as banks face

macro-prudential assessments (MPA) at month-end, the U.S. Fed is expected to

increase its interest rate, and the stability of both the yuan exchange rate and

capital flows faces pressure, the newspaper said, citing Wang Youxin, analyst at

a research institute under the Bank of China. Negotiable certificate of deposit

maturities will also peak this month, although structural index adjustments will

help reduce MPA pressure on banks, the newspaper said, citing Ming Ming, analyst

at CITIC Securities.

     Financial risks stemming from small- to medium-sized Chinese property

developers are likely to emerge later this year, as financing pressures

increase, the Economic Information Daily reported. As property policies are

still strict and the central government is working to curb house price growth,

these companies are at a disadvantage, particularly as consolidation within the

property sector accelerates, the newspaper said, citing industry insiders.

Policymakers should prevent illegal funds from flowing into the property market,

and should further guide property price expectations and the development of the

property market, the newspaper said.

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

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]