MNI China Daily Summary: Thursday, September 1

POLICY: The better-than-expected performance by China’s manufacturers in August shows recent rate cuts and fiscal stimulus are starting to have an effect, but more official measures will be necessary to boost demand, analysts told MNI.

DATA: China's August Caixin manufacturing PMI fell 0.9 points to 49.5, dipping back into the contraction zone below 50, as ongoing Covid-19 cases in some areas and tight power supply due to heatwaves and drought pressure the economy, the financial publisher said.

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) fell to 1.4255% from 1.7170% on Wednesday, Wind Information showed. The overnight repo average increased to 1.4768% from the previous 1.4322%.

YUAN: The currency weakened to 6.8990 against the dollar from 6.8905 on Wednesday. The PBOC set the dollar-yuan central parity rate lower at 6.8821, compared with 6.8906 set on Wednesday.

BONDS: The yield on 10-year China Government Bond was last at 2.6225%, down from Wednesday's close of 2.6400%, according to Wind Information.

STOCKS: The Shanghai Composite Index edged down 0.54% to 3,184.98, while the CSI300 index lost 0.86% to 4,043.74. Hang Seng Index tumbled 1.79% to 19,597.31.

FROM THE PRESS: The PBOC is unlikely to further lower its policy interest rates, as excess liquidity could lead to arbitrage opportunities as the Federal Reserve may still hike rates significantly, China Chief Economist Forum wrote in a blog post citing Sheng Songcheng, a former director of the Statistics and Analysis Department of the PBOC. Due to weak credit demand, more funds flow into the financial system rather than the real economy, and banks complete their lending requirement through bill discounting, said Sheng, noting that bill financing in July increased by CNY313.6 billion, accounting for 46.2% of the new yuan loans in the month.

Local governments should look to roll out detailed pro-growth measures in the first half of September to boost demand and underpin the recovery, according to a statement on the government website published late Wednesday following the State Council executive meeting. Local authorities should utilize the additional CNY300 billion financial instruments from policy banks to support more projects, including community renovation and provincial highways, alongside looking to boost private investment, the statement said. Cities should also meet housing demand with flexible mortgage policies and promote car sales, the statement added.

Local governments have stepped up efforts to sell state-owned resources and assets, including disposal of idle public housing and transferring mining rights, to plug the fiscal gap from reduced tax revenue, Caixin reported. In H1, the non-tax income of the Xinjiang autonomous region has increased by 107%, mainly due to the sales of oil and gas blocks, Caixin added.