MNI China Daily Summary: Thursday, Dec 21

LIQUIDITY: The People's Bank of China (PBOC) conducted CNY195 billion via 7-day reverse repo and CNY226 billion via 14-day on Thursday, with the rates unchanged at 1.80% and 1.95%, respectively. The reverse repo operation has led to a net injection of CNY159 billion reverse repos after offsetting CNY262 billion maturity today, according to Wind Information.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 1.8050% from 1.8046%, Wind Information showed. The overnight repo average increased to 1.7005% from 1.5792%.

YUAN: The currency weakened to 7.1450 against the dollar from 7.1336 on Wednesday. The PBOC set the dollar-yuan central parity rate higher at 7.1012, compared with 7.0966 set on Wednesday.

BONDS: The yield on 10-year China Government Bonds was last at 2.6325%, down from Wednesday's close of 2.6525%, according to Wind Information.

STOCKS: The Shanghai Composite Index rose 0.57% to 2,918.71 while the CSI300 index increased 1.01% to 3,330.87. The Hang Seng Index was up 0.04% to 16,621.13.

FROM THE PRESS: The government will increase use of refinancing bonds next year to address local government debt risk, according to analysts interviewed by Yicai.com. Given local governments will likely face declining revenue from land transfers next year, authorities will issue CNY2-2.5 trillion special refinancing bonds, according to Wang Qing, chief macro researcher at Golden Credit Rating. Following policymakers' recent commitment to strengthen fiscal policy moderately, Wang expects next years’ fiscal deficit of 3.5% and new local government special bonds to reach CNY4 trillion in 2024, an increase of CNY200 billion from over 2023.

The benchmark loan prime rates have room to move down next year to further reduce financing costs, but it will require more policy support to help ease the pressure on banks’ net interest margins, said Zhou Maohua, researcher at China Everbright Bank. The People’s Bank of China will likely lower the medium-term lending facility rate in H1 2024 as the U.S. Federal Reserve cuts rates, which will provide the PBOC more easing room and push down LPRs, said Wang Qing, researcher at Golden Credit Rating. LPR remained unchanged for the fourth month on Wednesday, with the one-year maturity at 3.45% and the five-year one at 4.2%.

Authorities should prepare for stress testing and risk investigation following a sharp increase in freight rates as more shipping firms pause Red Sea journeys over attacks, said Yicai.com in an editorial. If the Far East-Northwest Europe and Far East-Mediterranean routes are forced to detour around the Cape of Good Hope, the shipping distance will increase by 29.1% and 80%, with the sailing time lengthened by 10 and 19 days. ASEAN, the Middle East, Africa, and Europe account for an increasing share of China's exports, alongside a rising proportion of trade financing in yuan. Higher freight will inevitably magnify the risk of RMB trade financing. This has also pushed up international crude oil and natural gas prices, which could lead to a rebound in U.S. and Europe inflation and delay expected rate cuts.