MNI China Daily Summary: Thursday, July 27

     TOPS NEWS: Moody's Investor Service has revised its outlook on China's

banking system to stable from negative, pointing to improved asset quality in

the sector and efforts by the Chinese government to curb shadow banking. Moody's

said Thursday that the revision "reflects our expectations that nonperforming

loan formation rates will be relatively stable at current levels." Its previous

negative outlook stemmed from what it said was a deterioration in banks' asset

quality in 2015 and 2016. The government's "more coordinated policy measures" on

shadow banking "will help mitigate asset risks for banks, and address some key

imbalances in the financial system," the ratings agency added.

     TOP NEWS: Sales in Beijing's secondary housing market dropped significantly

in July, as the government's home-buying restrictions continued to bite and

seasonal factors came into play. Through July 23, 5,026 residential properties

had been sold in Beijing's secondary housing market, a 69% drop from a year ago

and 27% month-on-month decrease, the lowest transaction volume since July 2014,

according to data from Centaline Group, a Hong Kong-based property agency and

services company. "The market continues to be sluggish after entering the

traditionally slack [summer] season," Zhang Dawei, chief analyst of Centaline

Group, said in a report, adding that "the impact of control policies on the

housing market continues to strengthen." 

     DATA: Chinese industrial companies saw profits accelerate in June behind

rapid production growth and a rise in product sales, data from the National

Bureau of Statistics (NBS) released Thursday show. The combined profits of

Chinese industrial firms rose 19.1% year-on-year to CNY727.78 billion in June,

up 2.4 percentage points from the 16.7% y/y growth rate in May and also much

higher than a rise of 5.1% last June, the NBS said. The NBS attributed the surge

to faster growth in industrial output and product sales. An increase in profits

in three key industrial sectors contributed to a gain of 4.1 percentage points

for total industrial profits in June. The three sectors were automobiles,

ferrous metal processing and electronic product manufacturing.

     RATES: The PBOC announced on its website Thursday morning that it injected

CNY60 billion in liquidity via seven-day reverse repos, with the rate unchanged

at 2.45%. The statement gave no explanation for the injection. This resulted in

a net injection of CNY20 billion in the interbank market, as a total of CNY40

billion in reverse repos mature Thursday. The CFETS-ICAP money-market sentiment

index ended at 40 on Wednesday, down from 43 at Tuesday's close. The lower the

reading the better the liquidity conditions in the interbank market. Traders

said that the PBOC's operations are mainly to offset the repos maturing today so

that liquidity would be maintained in a tight and balance level.

     RATES: Money market rates rose. The seven-day repo average was last at

2.9182%, higher than Wednesday's average of 2.8405%. The overnight repo average

was at 2.8169%, higher than Wednesday's 2.7554%.

     YUAN: The yuan rose against the U.S. dollar after the PBOC set a stronger

fixing. The yuan was last at 6.7332 against the U.S. unit, compared with the

official closing price of 6.7545 on Wednesday. The PBOC set the yuan central

parity rate against the U.S. dollar at 6.7307, much stronger than Wednesday's

6.7529 after the dollar easing overnight after the Federal Resrve's policy

announcement. It was the strongest fixing since Oct. 18, 2016, when it was

6.7303. Today's fixing also marked the biggest daily rise in a month.

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

3.7481%, down from the previous close of 3.7689%, according to Wind, a financial

data provider.

     STOCKS: Stocks were up, led higher by the computer application and

telecommunication sectors. The benchmark Shanghai Composite Index closed up

0.06% at 3,249.78. Hong Kong's Hang Seng Index was up 0.77% at 27,148,56.

     FROM THE PRESS: Regulators could consider setting up a new multilevel

reserve requirement system to reduce pressure on liquidity and avoid the

negative effects of the current reserve requirement system, Zong Liang, chief

economist at Bank of China, said in a commentary published Thursday in the

Financial News, a journal run by the People's Bank of China. Zong suggested

China could have two levels of deposit reserve requirement, a legally required

minimum deposit reserve ratio of 7% and a voluntary adjusted one with a ratio of

10%. Commercial banks could borrow from the central bank using the additional

adjusted reserve requirement money stored at the central bank as collateral,

Zong said. Monetary policy should focus on guiding market expectations and

deleveraging at a moderate and stable pace in the second half of this year. The

central bank should increase its injections of medium- and long-term capital via

the Medium-term Lending Facility, particularly as regulations tighten and key

macro-prudential assessments occur, Zong noted. Deleveraging the real economy is

the key and macroeconomic policy needs to balance deleveraging with liquidity

stability, Zong added. (Financial News)

     Capital outflows, rather than high debt ratios, are likely to be the

biggest source of systemic risks in China in the period ahead, Yu Yongding, a

researcher with the Chinese Academy of Social Sciences and a former member of

the PBOC's Monetary Policy Committee, said Wednesday in an interview with Caixin

Magazine. China's international payment balance sheet contains large net errors

and omissions since a large amount of illegal capital fight has not been

recorded, Yu argued. Although capital outflows have slowed as the yuan exchange

rate has stabilized, some companies still have strong intentions to purchase

foreign exchange, Yu warned. Recent policies show regulators have noticed the

damage caused by capital fight, Yu noted. (Caixin Magazine)

     The banking sector's bad loan ratio is likely to rise as the economy slows

and overcapacity cuts accelerate in the second half of this year, the Shanghai

Securities News reported Thursday, citing a research note from the Industrial

and Commercial Bank's Financial Research Institution. Banks will continue

suffering operational pressures as their access to credit shrinks and their

traditional loan demand declines, the report said. The volatility of capital

availability will rise, which could cause liquidity shocks for certain medium-

and small-size banks. Rising fund-raising costs in both the credit and bond

markets could hurt the real economy, the report warned. The ICBC research group

predicts full-year GDP growth will be around 6.8% on average, the report added.

(Shanghai Securities News)

--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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