MNI China Daily Summary: Thursday, January 25

     YUAN: The Chinese The Yuan closed at the highest level on Thursday since

October, 2015, gaining 0.82% from Wednesday to close at 6.3350 against the U.S.

dollar. 

 - USD-CNY fell as much as 6.3148 for the day, the lowest since Nov. 2015

 - Dollar index slumped 0.2% to 89.09, the lowest since Dec. 2014

 - PBOC set the yuan central parity rate vs the U.S. dollar at 6.3724 on

Thursday, stronger than Wednesday's 6.3916. PBOC has set the fixing stronger for

five consecutive trading days. Today's fixing marks the highest since Nov 13,

2015. 

***COMMENT: Market sources told MNI that while the yuan would weaken after the

near-term gain, the length of the rally may dependent on the dollar's movement.

Settlement of forex accounts further boost yuan's appreciation. The dollar

tanked after Treasury Secretary Steve Mnuchin said at the WEF in Davos that he

is not concerned about a weakening dollar and that a cheaper dollar helps boost

U.S. exports and economic growth. 

TOP NEWS: Chinese companies will have more difficulties obtaining loans this

year on rising costs of capital and banks' shrinking credit available for

lending, the 21st Century Business Herald reported. 

 - Capital costs for small and medium-sized firms increased to as high as 10% in

some provinces. New loans totaled CNY1 trillion this year, half the amount in

last year, Herald said citing unidentified banking sources. 

***Comment: PBOC has pushed forward with its deleveraging campaign by reducing

short-term capital and encouraging long-term funding, while hiking the policy

interest rates through open market operations. Capital costs soared, which may

constrain growth.

     LIQUIDITY: PBOC skipped its Open Market Operations (OMO), stating that the

targeted required reserve ratio cut can absorb the impact of maturing reverse

repos. 

 - Net drain of CNY120 billion after CNY120 billion reverse repos mature 

 - Benchmark 7-day deposit repo average last at 2.7513%, vs 2.7958% on

Wednesday.

     RATES: Interbank market rates diverged. 

- 7-day deposit repo average last at 2.9083%, higher than 2.7958% yesterday 

- Overnight repo 2.5465%, lower than 2.5501% yesterday. 

***COMMENT: The targeted required reserve ratio cut takes effect today, which is

expected to inject around CNY300 billion to CNY380 billion into the banking

system.

     BONDS: Yield on 10-year China government bonds last traded 3.9425%, lower

than the 3.9500% close yesterday: Wind Information.

     STOCK: The Shanghai Composite Index closed down 0.31% to 3,548.31 as

securities shares fell. Hong Kong's Hang Seng Index fell 0.71% to 32,730.32.

     FROM THE PRESS: China will likely become the world's largest issuer of

local govt bonds in five years given its fast growth in selling municipal bonds,

China Daily reported, citing industrial sources and officials. - Outstanding

local government bonds, totaling CNY14.74 trillion (US$2.3 trillion) last week,

may increase by over 50% to surpass the U.S.; - Ministry of Finance is planning

to issue special local govt bonds to help stabilize growth.

***Comment: Issuing special government bonds is to tackle hidden debt from local

government financing vehicles(LGFVs). Local gov't debt issue can't be resolved

without wide reform of the fiscal system.

     China's partial reserve requirement ratio cut taking effect today won't

inject as much liquidity as the market expected given some banks cannot qualify,

Financial News reported citing analysts. - The cut will have merely temporary

effect and inject about CNY300-380 billion, while the market was expecting

CNY500 billion, the newspaper said. 

***Comment: Central bank authorities do not want to show any signs of easing

their neutral stance on monetary policy. Some market participants have voiced

speculations whether PBOC is contradicting its own neutral positions having

injected a fair amount of liquidity recently.

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]