MNI China Daily Summary: Thursday, August 27

EXCLUSIVE: China will have to cut income tax and boost social spending if it is to achieve the goals of boosting domestic demand and reducing dependence on exports set to be the centrepiece of the next five-year plan, advisors and government sources told MNI, although others in policy circles insist it is too early to abandon the investment-led model that has transformed the country.

POLICY: The People's Bank of China (PBOC) will promote the use of yuan in trade and investment and improve cross-border policies, the central bank said following a meeting hosted by Vice Governor Pan Gongsheng on Wednesday. The PBOC will work with relevant ministries to focus on fulfilling the needs of the real economy and smooth policy transmission to provide strong support for stabilising the Chinese economy, according to a statement on the bank's website.

POLICY: China's central bank should maintain the market-based yuan exchange rate formation and optimise financial resource allocation to enhance FX rate flexibility and allow fluctuations at stable levels, according to a research report by researchers of the monetary policy department of the PBOC. China should continue to increase the reflexibility of exchange rates to cushion external instabilities and uncertainties, the researchers said. It is important to keep yuan policies autonomous, and to focus on the domestic circulation.

LIQUIDITY: The PBOC injected CNY100 billion via 7-day reverse repos with the rate unchanged at 2.2%. This resulted in a net drain of CNY60 billion given the maturity of CNY160 billion of reverse repos, according to Wind Information. The operation aims to keep liquidity reasonable and ample, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) fell to 2.1532% from Wednesday's close of 2.1799%, Wind Information showed. The overnight repo average decreased to 1.4515% from the previous 1.6145%.

YUAN: The currency strengthened to 6.8794 against the dollar from 6.8919 on Wednesday. The PBOC set the dollar-yuan central parity rate lower for a third day at 6.8903, compared with Wednesday's 6.9079.

BONDS: The yield on 10-year China Government Bond was last at 3.0550%, up from the close of 3.0475% on Wednesday, according to Wind Information.

STOCKS: The Shanghai Composite Index gained 0.61% to 3,350.11, while the CSI300 index rose 0.54% to 4,731.35. Hang Seng Index lost 0.83% to 25,281.15.

FROM THE PRESS: The yuan and yuan assets may come under pressure on growing signs that the dollar index is solidifying, the market is turning risk-averse and U.S. fundamentals are slowly improving as the EU recovery is slowed by the pandemic, Shanghai Securities News reported citing Ming Ming, the vice president of CITIC Securities. Many domestic market participants are exporters and do not foresee a further strengthening of the yuan, the newspaper said citing Li Liuyang, an analyst with China Merchant Bank. The yuan's recent surge was supported by China's strong recovery and higher interest rates, the newspaper said.

Urban renewal plans by China's regional governments in the next five years may create as much as CNY10 trillion in new demand, the Economic Information Daily reported. Citing experts commenting on the so-called 14th Five Year Plans (2021-2025) developed by local authorities, the Daily's report said urban renewal measures, including spatial planning, land resources reallocation and remodeling existing homes, would help drive the next round of investments and growth. China needs to revitalise existing urban areas to avoid taking farm land, the report said.

Chinese bank lending to private and small companies may accelerate by over 30% y/y in the second half of the year backed by Government support policies, the Securities Daily reported citing Wang Qing, the chief analyst at Golden Credit Rating. Mid and long-term loans to manufacturers will also continue to grow faster than overall lending due to policies supporting high-tech manufacturing, Wang said. By the end of July, loans to manufacturers increased by 25.4% y/y, the fastest since 2010, while the balance of SME loans rose by 27.5%, the most in five months, the newspaper said.