MNI China Daily Summary: Friday, August 19

LIQUIDITY: The People's Bank of China (PBOC) injected CNY2 billion via 7-day reverse repos with the rate unchanged at 2.0%. This keeps the 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) increased to 1.4391% from 1.4193% on Thursday, Wind Information showed. The overnight repo average rose to 1.2065% from the previous 1.1885%.

YUAN: The currency weakened to 6.8088 against the dollar from 6.7925 on Thursday. The PBOC set the dollar-yuan central parity rate lower at 6.8065, compared with 6.7802 set on Thursday.

BONDS: The yield on 10-year China Government Bond was last at 2.6225%, up from Thursday's close of 2.6100%, according to Wind Information.

STOCKS: The Shanghai Composite Index edged down 0.59% to 3,258.08 while the CSI300 index lost 0.69% to 4,151.07. Hang Seng Index edged up 0.05% to 19,773.03.

FROM THE PRESS: The argument that China is accelerating the liquidation of its holdings of U.S. debt is misleading, with sales not matching the speed implied by some press reports, wrote Guan Tao, a former FX official and now global chief economist of BOC International, in a blog post. China’s holdings of U.S. debt have decreased by USD88 billion in the first five months of 2022, with net sales of mid-to-long-term debt only accounting for 24% of the reduction. The remaining 76% of the shrinkage can be attributed to some non-trading factors including negative valuation effect and the failure to roll over holdings after maturity. The remaining maturity of U.S. debt held by China is relatively short, with valuations of such paper greatly impacted by the rapid rise in short-term interest rates, said Guan, adding that the yields of 2-year, 5-year and 10-year U.S. Treasury bonds rose by 180bp, 155bp and 130bp, respectively, in the Jan-May period.

The PBOC has exerted its influence on two occasions since the start of August, in order to accelerate the development of over-the-counter bond trading between commercial banks as it aims to improve the liquidity of the bond market and form a more continuous and effective secondary market pricing mechanism, the Securities Daily reported. Regulators should diversify bond varieties to generate demand from individual investors, as over-the-counter bonds trading is dominated by treasury bonds, financial bonds issued by policy banks and local government bonds with higher credit ratings but lower yields, the newspaper said, citing analysts. Also, regulators can guide the issuance of some special bonds to support green finance and rural revitalization to expand the OTC bond market, the newspaper added.