MNI China Daily Summary: Thursday, December 28

     TOP NEWS: The yuan regained its position as the sixth most-used currency

for domestic and international payments by value in November, with a share of

1.75%, according to the Society for Worldwide Interbank Financial

Telecommunication (SWIFT), the international payments network. The yuan had

dropped to seventh position in October with a share of 1.46% due to seasonal

effects following China's Golden Week holiday, SWIFT said. Overall, the value of

yuan payments increased by 23.35% month-on-month in November, compared with a

19.10% decrease in October.

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

at 2.8899%, compared with Wednesday's average of 2.8773%. The overnight repo

average was at 2.6587%, compared with Wednesday's 2.6636%.

     LIQUIDITY: The People's Bank of China skipped open-market operations on

Thursday, saying that an increase in fiscal spending toward the year-end can

hedge the impact of maturing reverse repos and that liquidity conditions are

still at a high level. This resulted in a net drain of CNY30 billion for the

day, as a total of CNY30 billion in reverse repos matured. It was the fifth

consecutive trading day that the PBOC has skipped OMOs. The PBOC has drained a

net CNY240 billion from the interbank market so far this week, which analysts

said has worsened the structural problem of liquidity, particularly considering

that demand has increased at the end of the year. 

     YUAN: The yuan was stronger against the U.S. dollar on Thursday after the

People's Bank of China set the fixing rate slightly stronger for the day. The

yuan was last at 6.5411 against the U.S. unit, compared with the official

closing price of 6.5555 on Wednesday. The People's Bank of China set the yuan

central parity rate against the U.S. dollar at 6.5412 on Thursday, stronger than

Wednesday's 6.5421. Today's fixing was the highest since Sept. 13.

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

3.8800%, lower than the previous close of 3.9000%.

     STOCKS: Stocks rose, with the winery and textile sectors leading gains. The

benchmark Shanghai Composite Index closed up 0.63% at 3,296.38. Hong Kong's Hang

Seng Index was 0.12% higher at 29,782.15.

     FROM THE PRESS: The growth of M2, a broad measure of money supply, is

expected to fall to around 9% in 2018 in China, and the growth of credit will

also slow, as the authorities try to tackle debt risk and curb asset bubbles,

the 21st Century Business Herald reported Thursday, citing analysts and

economists. Growth in M2 has eased this year as a result of deleveraging in the

financial sector. New regulations for the wealth management sector will keep

biting, so off-balance sheet instruments and interbank business will continue to

decelerate, making double-digital growth in M2 next year hard to envision, the

report said. The pace of corporate loans is expected to remain stable

considering that the authorities are enhancing the financial sector's support of

the real economy and that lending costs are rising at a slower pace. But

household credit will be under downward pressure because of restrictions on

mortgage loans and other controls on the property market, the report said. (21st

Century Business Herald)

     Tightness in structural liquidity conditions has appeared in the interbank

market as the People's Bank of China has skipped open-market operations for

three consecutive days this week, the China Securities Journal reported

Thursday. The PBOC turned off its tap in the critical year-end period,

reflecting its bias toward tightness to control liquidity conditions with

consideration for strict regulation and deleveraging. But the structural problem

in liquidity allocation was already obvious, and the situation has been worse

than expected, the report said. Volatility in the bond and stock markets should

increase next year as tightness in structural liquidity becomes the norm, it

said. However, in the first quarter, conditions may loosen to accommodate a

marginal downturn in the economy, the report added. (China Securities Journal)

     The property market will be more stable in 2018, compared with the heavy

destocking and tight controls of the past two years, the Economic Information

Daily said in a front-page commentary Thursday. The Central Economic Work

Conference emphasized an expansion of the rental market and improving effective

mechanisms for the long term, and both goals need to be pursued at a proper

pace, the commentary said. Financial regulators will continue to stop excessive

flows of capital into the property market. Proposed property taxes that aroused

so much attention will not be implemented in the short term, the newspaper

predicted. (Economic Information Daily)

     The bond market is likely to rebound early next year with loosened

liquidity conditions and higher demand for bond purchases, the China Securities

Journal reported Thursday. Stable monetary policy and softened growth in

industrial profits will boost the performance of the bond market, but it will

not last long, the newspaper projected. Two factors will drag down the momentum:

strict financial regulation and higher inflation before the Chinese New Year.

Consumer inflation in January is expected to be around 1.5%, accelerating

further in February because of a lower comparison base in the same period in

2017 and the impact of the long holiday, the report said. (China Securities

Journal)

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

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

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