MNI China Daily Summary: Thursday, December 7

     TOP NEWS: The International Monetary Fund recommended Thursday that China

tighten regulation of its financial sector as risks continue to rise amid rapid

growth of the sector. Expansion of monetary and fiscal policies, regulatory

arbitrage by financial institutions mixed with a rise of their offerings of

increasingly complex investment vehicles, and the proliferation of implicit

guarantees for financial products pose risks to China's financial system, the

IMF said in its latest Financial System Stability Assessment (FSSA) of China.

     TOP NEWS: The International Monetary Fund's warning about increased

financial system risks in its latest Financial System Stability Assessment

(FSSA) of China does not reflect recent developments in the Chinese financial

system in a comprehensive way, the People's Bank of China said Thursday. Chinese

banks have strengthened their efforts to deal with non-performing loans, which

has helped them maintain their NPL ratios at low levels, the PBOC said.

Corporate profits, including those at state-owned companies, have improved

significantly this year and local government debts have been matched with the

assets that will generate cash profits in the future, so there is "little room"

for NPLs to be underestimated, the PBOC stressed. The IMF's assessment is

objective and unbiased, and China will refer to the advice while deepening its

financial reforms, the central bank said.

     TOP NEWS: In a drastically different tone to that heard during U.S.

President Donald Trump visit to Beijing a month ago, the Chinese government on

Thursday sharpened its rhetoric on trade relations with both the United States

and the European Union, charging that its two largest trading partners are

trying to weaken the World Trade Organization. At a press conference here,

Ministry of Commerce (MOFCOM) spokesman Gao Feng claimed the U.S. Trade

Representative's recent declaration refusing to recognize China as a market

economy "put domestic law over international law" and said the U.S. might be

trying to ignore WTO rules. Gao iterated that China urges all WTO members,

including the U.S. and EU, to comply with WTO rules "truly and entirely", in

particular stopping the use of the "surrogate country approach" in anti-dumping

trade actions.

     POLICY: The ongoing divergence between the lower yields of bonds issued by

well-heeled Chinese local governments -- particularly the nation's biggest

provinces and cities -- and much higher yields demanded for issues by poorer

rural governments, will exacerbate the fiscal problems that many local

governments face next year, MNI reported. Tightening liquidity conditions and

stricter regulation of financial institutions is prompting investors to be more

selective in their local government bond (LGB) investments. Local governments

with weak fiscal conditions are being forced to pay more to borrow, which will

weigh on local budgets even as demand to finance infrastructure spending remains

high. Given expectations that the government's financial deleveraging campaign

will continue unabated, the divergence in LGB yields could widen further,

increasing pressure on local governments' financing.

     RATES: Money market rates were higher on Thursday after no net liquidity

was injected as the PBOC injection of CNY270 billion via its open-market

operations balanced out the same amount of maturing reverse repos. The seven-day

repo average was last at 2.8011%, down from Wednesday's average of 2.7624%. The

overnight repo average was at 2.5710% compared with Wednesday's 2.5455%.

     LIQUIDITY: The PBOC announced on its website Thursday morning that it

injected CNY120 billion in liquidity via seven-day, CNY50 billion via 14-day,

and CNY100 billion via 28-day reverse repos, with rates unchanged at 2.45%,

2.60% and 2.75%, respectively. The PBOC did not give a further explanation of

its operations this morning. This resulted in no net injection/drain for the

day, as a total of CNY270 billion in reverse repos mature on Thursday. The PBOC

has drained a net CNY420 billion via OMOs so far this week as it skipped open

market operations in each of he first three trading days of the week.

     YUAN: The yuan rose against the U.S. dollar Thursday even though the

People's Bank of China set a weaker daily fixing. The yuan was last at 6.6142

against the U.S. unit, strengthening 0.01% compared with the official closing

price of 6.6150 on Wednesday. The People's Bank of China set the yuan central

parity rate against the U.S. dollar at 6.6195 Thursday, modestly weaker than

Wednesday's 6.6163. The PBOC has set the fixing weaker for nine consecutive

trading days, with today's fixing the weakest since Nov. 22.

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

3.9000%, up from the previous close of 3.8850%, according to Wind, a financial

data provider.

     STOCKS: Stocks were down, led lower by the coal mining sector. The

benchmark Shanghai Composite Index close down 0.67% at 3,272.05. Hong Kong's

Hang Seng Index was 0.16% higher at 28,270.40.

     FROM THE PRESS: The U.S. refusal to recognize China's market-economy

status, as part of a submission to the World Trade Organization in support of

the Europe Union's position in a Chinese complaint on EU anti-dumping actions,

is "playing dirty" and is actually trying to shock China's economic regime, the

Economic Information Daily, a newspaper under the official Xinhua News Agency,

said in a front-page commentary Thursday. On Dec. 11 last year, the rule that

China must prove its market economy status when defending itself against

anti-dumping accusations ended, the newspaper argued. But the U.S., Japan and

the EU still follow the rule, using China's supposed "non-market economy status"

as a weapon to impede Chinese exports, the commentary said. China should not be

disturbed by these outside factors but should deepen its reform and make itself

into a "strong trade country" and climb to a higher rung on the global trade

value ladder, it said. At the same time, China must continue to defend the

interests of its domestic sectors and never allow such "playing dirty" tactics.

(Economic Information Daily)

     Policy controls on the property sector are expected to continue and be

strengthened, the Securities Daily reported Thursday. In the past two months,

cities experiencing rapid housing price growth have been the subject of

frequent, sweeping examinations by regulators. The Ministry of Land and

Resources ordered examinations in 70 cities to check whether property developers

that had acquired land for residential use had actually started construction

based on their contract commitments. In addition, the National Development and

Reform Commission and Ministry of Housing and Urban-Rural Development conducted

examinations in 15 cities aimed at clamping down on manipulation of housing

prices. The two movements resulted in a total of 73 cities coming under tighter

oversight. The government initiatives aim to fill in regulatory voids and

reflect the Chinese government's determination to stabilize the property market,

analysts were cited as saying. The government will bring more cities under

supervision, stepping up examinations to clamp down on stockpiling of land and

housing price manipulation and other practices harmful to the health of the

property sector. (Securities Daily)

     Online lending default risk caused by delinquencies is a "grey rhino" for

China -- a risk that is likely to happen and have a significant negative impact

but has been largely ignored -- the South China Morning Post reported Wednesday.

High interest rates and penalties for not paying back loans have caused

thousands of young people run away from home and made their families suffer, the

newspaper said. Finance technology growth is booming in China because of the

large amounts of cheap capital accumulated by China's impressive economic growth

and because most adults have a cellphone. So low-income young people who had

been shunned by traditionally lenders are resorting to using financial firms

providing payday loans even without knowledge of the exact annualized interest

rate and penalty rules, the newspaper said. The Peoples' Bank of China has

recently issued policies to prohibit payday loan companies providing loans with

an interest rate more than a 36% annualized rate, the limit set by the

government. The central bank also ordered a pause in creation of new payday loan

companies and will exam existing companies. (South China Morning Post)

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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