MNI China Daily Summary: Thursday, December 14

     TOP NEWS: The People's Bank of China raised the interest rates on its open

market operation instruments and its Medium-Term Lending Facility (MLF) loans by

five basis points each, one day after the U.S. Federal Reserve raised its main

interest rate by 25 basis points. The PBOC raised the interest rate on its

seven-day reverse repos to 2.50% from 2.45%, the rate on its 28-day reverse

repos to 2.80% from 2.75%, and the rate on its one-year MLF loans to 3.25% from

3.20%, the central bank announced on its website. This was the first PBOC rate

hike since March 16, when the PBOC raise its open market operation and MLF loan

rates by 10 basis points each.

     TOP NEWS: China's November economic data was in line with expectations.

China's industrial output rose 6.1% year-on-year in November, lower than the

6.2% year-on-year increase in October. The November result matched the MNI

survey median forecast for a 6.1% rise. Retail sales rose 10.2% year-on-year in

November, lower than the MNI survey median forecast for a 10.3% gain but

stronger than the 10.0% growth rate in October. Fixed-asset investment rose 7.2%

year-over-year in the first 11 months of 2017, slower than the 7.3% gain posted

in the January-to-October period. The January-to-November figure matched the MNI

survey median forecast for a 7.2% increase.

     TOP NEWS: The rate hikes Thursday by the People's Bank of China should have

occurred sooner and been larger to address the imbalances in the current market

interest rate structure, former PBOC chief economist Ma Jun said. The PBOC move

signals that China intends to defend the yuan exchange rate against short

sellers and stabilize the interest rate gap with the U.S., Ma wrote in a

statement emailed to MNI. Ma, now director of the Center for Financial and

Development Studies at Tsinghua University, said rates should be raised further,

if conditions allow, to balance the interest rates between the PBOC's open

market instruments and the actual costs of borrowing in China's domestic

markets.

     RATES: Money market rates were lower. The seven-day repo average was last

at 2.8983%, compared with Wednesday's average of 2.9457%. The overnight repo

average was at 2.8115%, compared with Wednesday's 2.8143%.

     LIQUIDITY: The PBOC injected a net CNY50 billion in its open market

operation and CNY288 billion via its one-year Medium-term Lending Facility (MLF)

loans to hedge the impact of December tax payments and MLFs that mature Saturday

as well as to satisfy financial institutions' seasonal liquidity needs in order

to maintain stable overall liquidity conditions in the banking system, the PBOC

said in its announcement. The OMO and MLF operations resulted in a net injection

of CNY148 billion into the banking system today, as a total of CNY190 billion in

reverse repos mature Thursday. Taking account the CNY187 billion in MLF loans

that mature Saturday, the operations drained a net CNY39 billion.

     YUAN: The yuan was stronger against the U.S. dollar after the People's Bank

of China set the fixing rate much stronger for the day. The yuan was last at

6.6108 against the U.S. unit, compared with the official closing price of 6.6203

on Wednesday. The PBOC set the yuan central parity rate at 6.6033, 218 bps

stronger than Wednesday's 6.6251.

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

3.9100%, down from a previous close of 3.9250%.

     STOCKS: Stocks were down, led lower by financial sector. The benchmark

Shanghai Composite Index closed down  0.32% at 3,292.44. Hong Kong's Hang Seng

Index was 0.23% lower at 29,155.38.

     FROM THE PRESS: The reform movement to push mixed public-private ownership

and restructuring of state-owned enterprises will accelerate in 2018, the

Economic Information Daily reported Thursday. Regulators will enhance controls

on SOE funding, particularly for companies run by the central government. The

new round of mixed-ownership reform will focus on monopoly sectors including

oil, gas and railways, the report said, adding that sectors suffering excess

capacity, such as steel, coal and electricity generation, are also main targets.

In the next three years, deleveraging of SOEs finances will be stressed, which

will impact the overall level of fixed-asset investment, the report noted.

(Economic Information Daily)

     The momentum to tighten regulation of the asset management sector will not

change and regulators will remove asset management risks in an orderly and

steady manner, the Financial News, a journal run by the People's Bank of China

said in a commentary Thursday. Vested interest groups are trying to obstruct the

launch of the new regulations with the excuse that the new rules would cause

systemic risks, the commentary warned. Financial institutions will suffer some

short-term pain under the new regulations, and even see their asset management

businesses shrink, but regulators will not change course considering the

excessive financial market volatility that was triggered by the messy asset

management sector in recent years, the commentary stressed. (Financial News)

     China cannot simply follow the U.S government tax cut with one of its own,

as the country needs strong fiscal support and should maintain operating

efficiency improvement of state-owned enterprises as the top priority, the

Securities Times reported Thursday. China needs to increase its productivity and

maintain low aggregate costs to compete with the U.S, the report said. The U.S

can issue government bonds to supplement fiscal shortages and transfer crises,

but China can not. Chinese companies need to improve their core competitiveness

and should not rely on a tax cut, the report noted. In practice, China has

reduced its taxes by replacing the business tax with a value-added tax (VAT) and

removing many administrative fees, the report argued. (Securities Times)

--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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