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POLICY: Unexpectedly loose liquidity in China’s interbank market at a time of weak overall credit demand has pushed short-term repo market activity to historic levels, fueling concerns over financial fragility and likely prompting the central bank to reduce the size of its medium-term lending facilities next Monday, economists and analysts said.
LIQUIDITY: The People's Bank of China (PBOC) injected CNY2 billion via 7-day reverse repos with the rate unchanged at 2.1%. This keeps liquidity unchanged after offsetting the maturity of CNY2 billion repos today, according to Wind Information. The operation aims to keep liquidity reasonable and ample, the PBOC said on its website.
RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) decreased to 1.3315% from 1.3721% on Wednesday, Wind Information showed. The overnight repo average fell to 1.0270% from the previous 1.0675%.
YUAN: The currency strengthened to 6.7386 against the dollar from 6.7577 on Wednesday. The PBOC set the dollar-yuan central parity rate lower at 6.7324, compared with 6.7612 set on Wednesday.
BONDS: The yield on 10-year China Government Bond was last at 2.7300%, down from Wednesday's close of 2.7340%, according to Wind Information.
STOCKS: The Shanghai Composite Index gained 1.60% to 3,281.67 while the CSI300 index rose 2.04% to 4,193.54. The Hang Seng Index rallied 2.40% to 20,082.43.
FROM THE PRESS: The PBOC pledged to increase the intensity of prudent monetary policy but avoid massive stimulus and excessive money printing, as it looks to balance economic growth and price stability, Yicai.com reported, citing the central bank’s Q2 monetary policy report released late Wednesday. The PBOC warned of increasing structural inflation pressures, with CPI set to rise from the 1.7% level seen in H1, and likely exceeding 3.0% in some months of H2, said Yicai. Still, it is widely believed that overall price pressures will remain subdued and will not constrain monetary policy, providing space for stabilising growth and expanding demand, said Yicai, citing analysts.
China should further improve the quotation mechanism of the central parity rate of the yuan, and vigorously develop its FX market by enriching trading products, expanding trading entities and relaxing trading restrictions, the Securities Daily reported, citing Guan Tao, a former FX official and now chief economist at BOC Securities. Further relaxation of the exchange rate fluctuation limit may be considered after the economic recovery stabilises, though it is also necessary to retain the autonomy of exchange rate management and hold sufficient FX reserves, the newspaper said, citing Wang Youxin, senior researcher at Bank of China Research Institute.
Fresh Covid-19 outbreaks in West China’s two autonomous regions, Xinjiang and Tibet, have put several cities there into temporary lockdowns for three or five days, Caixin reported. The outbreaks in Xinjiang, Inner Mongolia and Guangdong province are rapidly developing, with a risk of further spread to society, while outbreaks in Tibet have a high risk of spreading, said Caixin, citing Mi Feng, spokesperson of the National Health and Medical Commission at a Wednesday briefing. Since August, nine provinces have reported more than 100 local infections, including over 2,000 cases in Hainan province, indicating a severe and complicated anti-pandemic situation, said Caixin.
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