MNI China Daily Summary: Thursday, August 3

     TOP NEWS: The expansion of the Chinese services sector eased in July, as

new orders and output softened, according to the latest survey of services

sector purchasing managers jointly released by Caixin magazine and Markit. The

headline index fell to 51.5 in July from 51.6 in June. The reading was the same

as April's 51.5. A smaller increase in production was the main cause for the

slowdown in the Caixin services PMI. The output index expanded at the slowest

pace since May 2016, and was at the same level as April, according to Caixin. A

slower growth in new work also contributed to the fall. New order growth fell to

the weakest level in 16 months, Caixin said, adding that service providers

complained that fewer client numbers had weighed on subdued sales.

     TOPS NEWS: Local governments in China have been experiencing difficulties

in cancelling their guarantees on local government funding vehicle (LGFVs)

debts, PPP projects and government investment fund projects, the 21st Century

Business Herald reported on Wednesday. In the past, LGFVs have often borrowed

money from financial institutions, with local governments guaranteeing to the

financial institutions that the money will be paid back using government funds,

putting the financial risk on the governments rather than the financial

institutions, which is illegal according to China's Budget Law.

     TOP NEWS: Chinese economists have suggested that the People's Bank of China

could make some changes in its bank reserve requirement system (RRS) to deal

with the tightening liquidity situation in the process of stabilizing leverage

in the financial sector. In a recent commentary in the Financial News, a journal

run by the PBOC, Zong Liang, chief economist at Bank of China, said the

regulator could consider setting up a new multilevel RRS -- a legally required

minimum deposit reserve ratio of 7% and a voluntarily adjusted one with a ratio

of 10% -- to reduce pressure on liquidity and avoid the negative effects of a

direct reduction of the current reserve requirement ratio (RRR).

     POLICY: Exports and imports of cross-border e-commerce in 13 pilot

districts in the first half of the year reached CNY100 billion, more than

doubling the amount in the same period last year, Gao Feng, spokesman for the

Ministry of Commerce, said Thursday. He added that the sector has become "a new

economic growth point" for China's economy and is undergirding China's

industrial restructuring.

     POLICY: The China Convenience Stores Prosperity Index (CCSPI), which was

created at the end of June along with the China Shopping Malls Development Index

(CSMDI), reached 73.95 in the second quarter, 1.7 points higher than the first

quarter, reflecting "stable and rising confidence" in the sector, the Ministry

of Commerce said Thursday at a briefing in Beijing. The index gauges market

confidence in convenience stores' sales, revenue and profit growth. The

increased investment in the sector and the emergence of automated convenience

stores without salespeople also boosted the confidence of owners, managers and

workers in the sector, the ministry said. But the report also showed that

managers and operators of convenience stores are concerned about rent, utilities

and employment costs, according to the ministry.

     RATES: Money market rates were mixed on Thursday. The seven-day repo

average was last at 2.8740%, up from Wednesday's average of 2.8657%. The

overnight repo average was at 2.7870% compared with Wednesday's 2.8594%.

     YUAN: The yuan fell against the U.S. dollar Thursday after the People's

Bank of China set a weaker daily fixing. The yuan was last at 6.7232 against the

U.S. unit, compared with the official closing price of 6.7219 on Wednesday. The

People's Bank of China set the yuan central parity rate against the U.S. dollar

at 6.7211 Thursday, weaker than Wednesday's 6.7205.

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

3.7100%, down from the previous close of 3.7567%, according to Wind, a financial

data provider.

     STOCKS: Stocks were down, led lower by the insurance and financial trust

sectors. The benchmark Shanghai Composite Index closed down .37% at 3,272.93.

Hong Kong's Hang Seng Index was 0.28% lower at 27,530.42.

     FROM THE PRESS: The local government bond depositary balance grew CNY999.7

billion in July, the highest level in 13 months, according to data from China

Central Depository and Clearing Company, the official bond clearing house, Wind

reported Thursday. The outstanding depositary balance of local government bonds

totaled CNY47.44 trillion as of the end of July. The bond depositary balance of

foreign institutions rose by CNY37.8 billion in July, the biggest expansion

since last October, after the Bond Connect program launched its initial

"Northbound" phase -- an indication that foreign investors are increasing their

holdings of Chinese bonds. (Wind)

     Banks need to raise capital because of interest-rate differentials, asset

quality and increased government supervision, the Economic Information Daily

reported Thursday. Some banks are issuing convertible bonds -- and total

issuance may rise to CNY125.2 billion, the report said. Banks must increase

asset growth at a 13% year-over-year pace to maintain leverage levels and for

the country to maintain a 6.5% GDP growth rate, according to the Bank of China's

Finance Research Institute's Xiong Qiyue. However, this will be difficult in the

current environment and pressure on banks is increasing as the growth rate of

capital is slower than that of assets, the report said. The government's

deleveraging campaign, macro-prudential assessment, a clampdown on illegal

practices in interbank certificates of deposits and bank's wealth-product

management are making banks' need for capital replenishment more urgent, the

report said. (Economic Information Daily)

     The environment nurturing "grey rhinos" -- including shadow banking,

property bubbles and illegal financing -- must be changed to prevent financial

sector risks, according to a front-page commentary in the Economic Information

Daily, a newspaper run by the official Xinhua News Agency. Grey rhinos are

caused by credit relationships and asset allocation of microeconomic

participants, the commentary said. Those responsible for some economic costs

should provide insurance for some assets and need to be identified, it said. The

"morals" of market participants must improve, the commentary said. (Economic

Information Daily)

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

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

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