MNI China Daily Summary: Monday, September 4

     TOP NEWS: China needs to make clear to Pyongyang through various channels

that its nuclear tests must never contaminate China's northeastern provinces,

the state-run mouthpiece Global Times said in an editorial on Sunday following

the detonation of a nuclear bomb by the DPRK Sunday morning. China's strategic

security and environmental safety is the bottom line for China in showing

restraint; if North Korea crosses that line, the current framework for

Sino-North Korean ties will break down, the daily warned. Still, if DPRK's

nuclear activities don't contaminate China's northeastern regions, China should

avoid imposing overly aggressive sanctions on North Korea, such as cutting off

its oil supply or closing the border, as doing so will shift the focus of the

conflict to China, rather than keeping it on the United States, it said.

     TOP NEWS: The coordination of fiscal and monetary policies needs to be

improved to stabilize inflation, boost the economy, ensure employment growth and

achieve a balance of international payments, the Financial News, a journal run

by the People's Bank of China, said in a commentary Monday. The two policies

have different functions and focuses but can be complementary and so should

increase interaction, the commentary argued. In the process of deleveraging and

reducing overcapacity, monetary policy should improve the distribution of

financial resources, while fiscal policy should enhance structural adjustments

and control the growth of local government debt. The key to effective financial

reforms is strengthening budget management and unifying fiscal and financial

policies, the commentary added. (Financial News)

     LIQUIDITY: The People's Bank of China skipped its open market operations

Monday, saying  the liquidity level in the banking system was "relatively high"

so that te influence of maturing reverse repos can be "absorbed." This resulted

in a net drain of CNY140 billion for the day, as a total of CNY140 billion in

reverse repos mature on Monday. There will be a total of CNY370 billion of

reverse repos maturing this week. A total of CNY169.5 of medium-term lending

facilities (MLF) will mature on Thursday. The CFETS-ICAP money-market sentiment

index ended at 37 on Friday - down from 42 at Thursday's close. The lower the

reading the better the liquidity conditions in the interbank market. 

     RATES: Money market rates fell. The seven-day repo average was last at

2.8927%, lower than Friday's average of 2.9408%. The overnight repo average was

at 2.7183%, lower than Friday's 2.7930%.

     YUAN: The yuan continued its rise against the U.S. dollar after the

People's Bank of China set a much stronger daily fixing. The yuan was last at

6.5410 against the U.S. unit, compared with the official closing price of 6.5679

on Friday. As of 3 pm today, the yuan has appreciated 0.41% against the U.S.

dollar, floating in a range from 6.5380 to 6.5565. The PBOC set the yuan central

parity rate against the U.S. dollar at 6.5482, much stronger than Friday's

6.5909. Today's fixing was the highest since June 23 last year and the biggest

daily rise since Aug. 10.

     BONDS: The yield on benchmark 10-year China government bonds was last at

3.6107%, up from the previous close of 3.6074%, according to Wind, a financial

data provider.

     STOCKS: Stocks were up slightly, led higher by shares of banks. The

benchmark Shanghai Composite Index closed up 0.37% at 3,379.58. Hong Kong's Hang

Seng Index was 0.95% lower at 27,693.87.

     FROM THE PRESS: China strongly condemned North Korea's sixth and most

powerful nuclear test late Sunday morning, the South China Morning Post reported

Sunday. The test triggered a 6.3-magnitude quake followed by a 4.6-magnitude

tremor, and was felt throughout northeastern China. "The Chinese government

resolutely opposes and strongly condemns this," the Chinese foreign ministry

said after North Korea confirmed the test. "We urge North Korea to recognise the

determination of the international community to achieve a denuclearised Korean

peninsula ... and to return to the path of resolving conflicts through

dialogue." China will continue to implement UN sanctions against Pyongyang in a

"comprehensive manner", the ministry said. China's nuclear safety agency also

started monitoring radiation levels in its northeastern border areas on Sunday,

the SCMP noted. China and Russia agreed late Sunday to "appropriately deal with"

the test, while Chinese President Xi Jinping met his Russian counterpart

Vladimir Putin in Xiamen, Fujian province, ahead of Monday's BRICS leaders'

summit, Xinhua reported. (South China Morning Post/Xinhua)

     It is a good time for China to continue reform of its exchange rate system

because the economy is showing good momentum, capital flows have stabilized and

yuan depreciation expectations have largely reversed, Yu Yongding, a researcher

with the Chinese Academy of Social Sciences and a former member of the People's

Bank of China Monetary Policy Committee, said in an interview with China

Securities Journal published Monday. The authorities should implement measures

to deepen reform of the exchange rate formation mechanism as soon as possible to

achieve a floating yuan exchange rate, Yu noted. The influence of market

expectations on capital flows and the exchange rate should not be exaggerated

since economic fundamentals are the decisive element, Yu argued. Cross-border

capital flows have improved due to strict regulatory controls but there are

still challenges ahead, Yu warned. (China Securities Journal)

     Interbank funding costs for low-rated banks are likely to see a sharp rise

due to new regulations prohibiting issuance of the NCDs with maturity of more

than one year, the Shanghai Securities News reported Monday. The People's Bank

of China is also considering including NCD issuance in its quarterly

macro-prudential assessment of banks, which would increase the interest rate

spread for the NCDs issued by banks with different ratings, the report said. As

of September 3, the volume of the NCDs issued by banks rated lower than AA+

accounted to 13.7% of total outstanding NCDs, the report noted. Although the new

regulations do not prohibit money market funds from investing in NCDs, their

willingness to invest in lower-rated issues will obviously decline. Some small

banks have already started to reduce their issuance, the report added. (Shanghai

Securities News)

     Chinese President Xi Jinping said Monday that China will set aside CNY500

million for economic and technological cooperation and exchanges among BRICS

countries, Xinhua News Agency reported. Xi made the statement during a BRICS

leaders' summit in the southeastern Chinese city of Xiamen. Xi also said China

would invest $4 million in the BRICS countries' New Development Bank. (Xinhua)

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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