MNI China Daily Summary: Thursday, July 5

     TOP NEWS: China will not initiate any tariff action before the USD34

billion tariff package is implemented this Friday, but China will be forced to

retaliate once the tariffs are enforced, China Ministry of Commerce said. U.S.

tariff actions "are not just firing at the world, but at U.S. itself," stressed

Gao, referring to potential damages in global supply and value chains.

     TOP NEWS: Washington's recent decision to temporarily lift a ban on Chinese

tech giant ZTE should not be seen as a sign that the U.S. will back down from

its plans to impose tariffs on USD34 billion worth of Chinese goods from July 6,

a former U.S. trade official told MNI in an interview.

     TOP NEWS: The People's Bank of China (PBOC) should not intervene in the

forex market, as economic fundamentals are still supportive and capital outflow

pressures are not large, Zhang Bin, director of the Global Macro economy

Research Division of the Chinese Academy of Social Sciences, told MNI. "The

central bank should not restart the forex counter-cyclical factor, because as

long as the factor is in place, the pricing mechanism of would be disturbed,"

Zhang said.

     YUAN: While policymakers' willingness to prevent a yuan collapse is no

doubt positive for the currency, their ability to prevent further medium-term

weakness is questionable. The big picture is that China's economy is coming off

the back of a major credit boom and low or negative real interest rates will be

necessary and desired in order to prevent a destabilizing deleveraging cycle. In

this context, the recent 3% drop in the currency's real effective exchange rate

is not particularly large.

     LIQUIDITY: The PBOC skipped open market operations on Thursday, stating on

its website that a relatively high level of liquidity can absorb maturing

reverse repos. That resulted in a net drain of CNY140 billion, as the same

amount of reverse repos matured today, according to the PBOC. The PBOC will

implement the reserve requirement ratio cut today, releasing liquidity of CNY700

billion. CFETS-ICAP's money-market sentiment index closed at 26 on Wednesday,

down from 28 on Tuesday.

     MONEY MARKET RATES: Benchmark 7-day deposit repo average fell to 2.5146% on

Thursday from 2.5927% on Wednesday; Overnight average decreased to 2.0470% from

2.0855% on Wednesday: Wind Information.

     YUAN: The yuan opened at 6.6399 against the U.S. dollar Thursday, weaker

than Wednesday's official close of 6.6211, and also weaker than today's central

parity rate of 6.6180 set by the PBOC, which itself rose dramatically from

Wednesday's 6.6595. Today's surge marks the biggest daily rise since Oct 11,

2017.

     BONDS: The yield on benchmark 10-year China Government Bond was last at

3.5000%, down from the previous close of 3.5075%, according to Wind Information.

     STOCKS: Shares in Shanghai continued to decline due to the low market

sentiment in response to the yuan's fluctuations and the approaching U.S.-China

tariff deadline tomorrow. Shanghai Composite Index closed 0.92% lower at

2733.88, Hong Kong's Hang Seng Index declined 0.57% to 28080.72.

     FROM THE PRESS: As China's economy focuses more on high quality development

than on a high growth rate, the leverage ratio will naturally decrease, Economic

Daily reported, citing Liu Shijin, member of the Monetary Policy Committee of

the PBOC. The country's deleveraging campaign has achieved some preliminary

results as the leverage ratio stabilizes, Liu noted. The leverage structure is

also optimizing, with a lower leverage ratio for the business sector and in the

asset-liability ratio of state-owned enterprises, Liu added.

     The PBOC's monetary policy this year has balanced liquidity and structural

support, both maintaining the liquidity at reasonable and sufficient levels and

leading financial resources to small and micro enterprises, said Financial News,

an official publication of the PBOC, in a commentary. The PBOC released

liquidity of CNY2.8 trillion in the first six months of 2018, far exceeding a

total of CNY1.76 trillion released in the whole of last year, the newspaper

noted. The bond market is stabilizing, while appropriate bond defaults will help

the market mature and develop healthily in the long term, the commentary said.

     Consumption growth is expected to rise slightly in the second half of the

year, contributing over 60% of the overall economic growth this year, Shanghai

Securities News reported, citing Lian Ping, chief economist of Bank of

Communications. Further opening-up, an expansion in imports as well as

individual income tax reforms will have positive impacts on consumption, Lian

added. With the increase of industrial profit and a cut in manufacturing taxes,

manufacturing investment should accelerate in the second half of the year,

marking an annual growth at about 6%, Lian predicted.

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

--MNI Beijing Bureau; +86-10-8532-5998; email: beijing@marketnews.com

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