MNI China Daily Summary: Thursday, August 1

EXCLUSIVE: The People’s Bank of China (PBOC) will likely cut its policy rate further to guide down the reference lending rate by 10-20 basis points over the remainder of 2024 following Q2’s poor GDP growth, policy advisors and economists told MNI, adding deposit rate reductions and possible U.S. Federal Reserve easing will aid the central bank’s task ahead.

POLICY: Authorities retain ample room for counter cyclical policy adjustments in H2 as the government remains confident in achieving this year's economic targets, said Zhao Chenxin, deputy director at the National Development and Reform Commission.

DATA: China's Caixin manufacturing PMI registered 49.8 in July, down by 2.0 points from June, marking the first contraction below the 50 mark since November 2023, the financial publisher said.

LIQUIDITY: The PBOC conducted CNY10.37 billion via 7-day reverse repo, with rate unchanged at 1.70%. The operation has led to a net drain of CNY224.73 billion after offsetting the CNY235.1 billion maturity today, according to Wind Information.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) fell to 1.7049% from 1.7999% on Wednesday, Wind Information showed. The overnight repo average decreased to 1.6125% from the previous 1.7980%.

YUAN: The currency weakened to 7.2446 against the dollar, from 7.2261 at Wednesday's close. The PBOC set the dollar-yuan central parity rate lower at 7.1323, compared with 7.1346 set on Wednesday. The fixing was estimated at 7.2154 by Bloomberg survey today.

BONDS: The yield on 10-year China Government Bonds was last at 2.1325%, down from Wednesday's close of 2.1470%, according to Wind Information.

STOCKS: The Shanghai Composite Index lost 0.22% to 2,932.39, while the CSI300 index edged down 0.66% to 3,419.27. The Hang Seng Index was down 0.23% to 17,304.96.

FROM THE PRESS: The PBOC will likely cut the reserve requirement ratio in Q3 to fill the funding gap amid increased maturity of medium-term lending facilities since August and accelerated issuance of government bonds, Securities Daily reported citing Li Chao, chief economist at Zheshang Securities. The PBOC may cut interest rates in Q3 to accelerate credit supply, said Wang Qing, chief macro analyst at Golden Credit Rating, noting further reduction in the policy interest rate in Q4 cannot be ruled out depending on economic and price conditions.

China’s July PMI of 49.4 indicates the government should expand public investment in H2 to drive up corporate orders and stimulate domestic demand, Zhang Liqun, analyst at the China Federation of Logistics and Purchasing, told the Securities Daily. Zhao Qinghe, a senior statistician at the National Bureau of Statistics said insufficient market demand and extreme weather negatively impacted producers in July. Wen Tao, analyst at the China Logistics Information Center noted manufacturers remained optimistic, with production and operation activity expectation sub-indexes above 53.0.

China should speed up legislation to promote consumption tax reform following the Party’s Third Plenum, which called on local governments to increase their share of tax revenue, Liu Zuo, former director at the Taxation Research Institute of the State Administration of Taxation wrote in a commentary published on 21st Century Business Herald. China could expand taxable items to a wider range of luxury goods and high-end consumption including private jets and golf. Taxation on items with strong regional characteristics, such as entertainment and sports, should be assigned to local governments, while that on flexible items such as cigarettes, refined oil and automobiles should be retained by the central government to avoid disparities in tax revenue across regions, Liu said. The central government currently collects 100% of consumption tax revenue.