MNI China Daily Summary: Thursday, January 4

     TOP NEWS: The People's Bank of China is expected to step in and curb the

sharp rally of the yuan over concerns that its strengthening is likely to hurt

exports and that expectations for further appreciation of the currency have

stimulated market speculators. The Securities Times, an official economic

journal run by the People's Daily, stressed in a front-page commentary on

Wednesday that the PBOC needs to give the market some indication that it will

stop the "over-expansion" of yuan appreciation expectations and stabilize the

forex market. "There is already a sign of the 'herd effect' in the market since

market participants are rushing to sell dollars, so the PBOC should not sit

still for too long," A Beijing forex trader with one of the big state-owned

banks told MNI.

     TOP NEWS: The People's Bank of China skipped open-market operations

Thursday, saying the liquidity level in the banking system is at a "relatively

high" level. This resulted in a net drain of CNY130 billion for the day, as a

total of CNY130 billion in reverse repos matured on Thursday. It was the ninth

consecutive trading day the PBOC has skipped open-market operations.

     DATA: The Chinese services sector expanded in December at the fastest pace

since August 2014 due to robust new orders, according to the latest survey of

purchasing managers jointly released by Caixin magazine and Markit. The headline

Caixin Services PMI jumped to 53.9 from 51.9 in November, the third consecutive

rise. The rise in the Caixin services index was in line with with the pickup in

the official services PMI jointly released Dec. 31 by the China Federation of

Logistics and Purchasing and the National Bureau of Statistics. The CFLP/NBS

Services PMI rose to 55.0 from November's 54.8 reading.

     POLICY: Financial regulators have strengthened their crackdown on banks'

issuances of negotiable certificates of deposit (NCDs) as the government pushes

ahead and deepens its financial deleveraging campaign, according to a report in

the Securities Times. There were rumors earlier this week that the People's Bank

of China had issued a new regulation that NCDs would now be considered as

interbank liabilities, with total interbank liabilities not being allowed to

exceed one-third of the total liabilities of any single financial institution,

retroactive to September. The rumors were confirmed by the Securities Times on

Wednesday night.

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

at 2.6958%, compared with Wednesday's average of 2.7302%. The overnight repo

average was at 2.4485%, compared with Wednesday's 2.4964%.

     YUAN: The yuan fell against the U.S. dollar after the People's Bank of

China set the fixing rate weaker for the day. The yuan was last at 6.5040

against the U.S. unit, compared with the official closing price of 6.5017 on

Wednesday. The People's Bank of China set the yuan central parity rate against

the U.S. dollar at 6.5043 on Thursday, weaker than Wednesday's 6.4920. It was

the first weaker fixing after five straight trading days of stronger fixings.

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

3.9500%, compared with the previous close of 3.9300%.

     STOCKS: Stocks were up, led higher by the mining service sector. The

benchmark Shanghai Composite Index closed up 0.49% at 3,385.71. Hong Kong's Hang

Seng Index was 0.56% higher at 30,731.61.

     FROM THE PRESS: The yuan exchange rate with the U.S. dollar is likely to

maintain its "two-way" fluctuation trend in 2018, but it's also possible that

the yuan will continue to strengthen, Xie Yaxuan, chief macroeconomic analyst

for China Merchants Securities, and a former official at the People's Bank of

China and State Administration of Foreign Exchange in Shenzhen, wrote in an

article published Thursday in the Financial News, a newspaper managed by the

PBOC. The yuan has remained basically stable and the market's expectation for

the yuan has also been stable in general, Xie said, which has led the PBOC to

halt its intervention in the foreign exchange market and helped foreign exchange

reserves to rebound. In 2018, the yuan could rise further if the supply of

foreign currencies exceeds demand, and if capital inflows into China pick up

when the country takes further steps to open its domestic markets, Xie said. The

PBOC wants the yuan exchange rate to reflect the effectiveness of its monetary

policy, so it is likely to engage in little if any market intervention this

year, he said, adding that foreign exchange reserves could increase modestly

further. (Financial News)

     The yuan is expected to remain stabile and even rise in 2018, the Economic

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

Thursday in a front-page report, citing experts. Xie Yaxuan, China Merchants

Securities' chief macroeconomic analyst, a former official at the Shenzhen

branch of the People's Bank of China and State Administration of Foreign

Exchange, predicted the yuan was likely to fluctuate between 6.45 to 6.95 to the

dollar this year. Wang Youxin, FX analyst at the international finance research

institute of the Bank of China, said he expects the yuan will continue to

strengthen, though the rise is not likely to be as large as last year. Wang

projected the rise would be around 2.5%, with the U.S. dollar entering a

downward trend as European countries and Japan start to consider normalizing

their monetary policies. (Economic Information Daily)

     Chinese Premier Li Keqiang stressed the need for further improvement of the

business environment and innovation, People's Daily reported Thursday. In a

regular State Council meeting, Li said China would further reduce certain taxes

and fees on companies to improve the business environment, and would also strive

to advance intellectual property protection. China will increase support for

science studies to enhance innovation, he stressed. (People's Daily)

     Some Chinese financial institutions and property companies are making

preparations to launch real estate investment trusts (REITs), the China

Securities Journal said in a front-page report. Citic Securities, China

Merchants Securities and Bohai Huijin Securities already participate in related

businesses, while other securities and investment banks are discussing new

programs, sources told the newspaper. But taxation issues remain a problem,

meaning REITs still need more time to develop, according to the newspaper.

(China Securities Journal)

     Financial regulators have tightened control over financial institutions'

bond repurchase transactions in order to stem high leverage ratios and prevent

under-the-table deals, the Economic Observer reported Thursday, citing sources

with knowledge of the information. The new rules, issued by the People's Bank of

China and China's banking, securities and insurance regulators, set caps on the

outstanding volume of repo and reverse repo transactions of bond market

participants. For banks, if the outstanding volume of such transactions exceeds

80% of their net assets, they need to report their financial data to regulators.

The cap for insurers is 20%, and 120% for securities firms, fund houses and

futures brokerages. According to the rules, financial institutions must also

sign written deals when conducting bond repo or bond forward transactions.

(Economic Observer)

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

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

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