MNI China Daily Summary: Thursday, June 21

     TOP NEWS: China's Ministry of Commerce said Thursday that America's "big

stick-waving" negotiation tactic, referring to its method of intimidation

characterized by protectionism and threats, serves no purpose against China.

"Such irrational behavior (of the U.S. government) impedes finding a solution to

the problems," said Gao Feng, spokesman of the ministry, at a weekly press

briefing. If the U.S. implements the tariff lists, China will certainly

retaliate, Gao said. He iterated China has made sufficient preparations to take

quantitative and qualitative measures against the U.S.

     TOP NEWS: Foreign businesses in China may incur substantial losses as China

begins to flex its muscles responding to the trade war, a Beijing-based European

commerce representative told MNI. "If China has to deploy different tools it

has, it will certainly have a negative impact on the business environment" both

in China and globally, Mats Harborn, president of the European Union Chamber of

Commerce in China, said in an interview. The root of the cause of the problem

lies in China; China hasn't done enough to reform and open up for foreign

companies to show that it's serious about removing business obstacles and ending

unequal treatment for foreign businesses, he said.

     POLICY: USDCNH continues to push higher amid the ongoing collapse in

interest rate differentials between the two countries. The diverging

trajectories of interest rate expectations leaves the yuan at risk of a sharp

downside more. The pair has taken out the June 19 high and shows no sign of

reversing from its current level of 6.51. The spread of 2-year swaps between the

two countries has fallen to just 29bps. (3.23% for China and 2.83% for the US).

     LIQUIDITY: The People's Bank of China injected CNY60 billion via its 7-day

reverse repos and CNY40 billion via 14-day reverse repos on Thursday, resulting

in a net injection of CNY30 billion as a total of CNY70 billion reverse repos

matured today, according to Wind Information. CFETS-ICAP's money-market

sentiment index closed at 43 on Wednesday, down from 47 on Tuesday.

     MONEY MARKET RATES: Benchmark 7-day deposit repo average fell to 2.6504% on

Thursday from 2.8140% on Wednesday; Overnight average fell to 2.5670% from

2.6093% on Wednesday: Wind Information.

     YUAN: The yuan weakened to 6.4793 against the U.S. dollar on Thursday from

Wednesday's 6.4715 closing, following today's weaker fixing. The PBOC set the

yuan central parity rate at 6.4706, weaker than Tuesday's 6.4586.

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

3.2600%, down from the previous close of 3.2800%, according to Wind Information.

     STOCKS: Shares closed lower in Shanghai due to concerns on the China-U.S.

trade row, after a slight recovery yesterday. Shanghai Composite Index closed

1.37% lower at 2875.81. Hong Kong's Hang Seng Index declined 1.22% to 29328.23.

     FROM THE PRESS: China will use targeted required reserve ratio cuts and

other monetary policy tools to support the provision of credit to micro and

small-sized banks, reported Shanghai Securities News on Thursday. It was also

announced during the executive meeting of the State Council held by premier Li

Keqiang. The quota for the refinancing and rediscount of micro and small-sized

banks will be increased and the interest rate of refinancing for micro and

small-sized companies loans will be cut, Li said, according to the report. China

will continue to keep its monetary policy prudent and neutral, while keeping

liquidity reasonable and abundant and also keeping the financial sector

operating steadily, the premier was quoted by the report.

     Big banks are cutting their interbank assets, and small- to medium-sized

banks are reducing their dependency on interbank liabilities, showing the

effects of the ongoing financial deleveraging campaign, Securities Times

reported. The interbank liabilities of small- and medium-sized banks reduced to

CNY12.82 trillion in May from CNY14.01 trillion at the end of 2017, the lowest

in 17 months; and big banks saw their interbank assets dropping from CNY5.05

trillion last year to CNY4.04 trillion in May, the report said, according to

data from the PBOC. Small- and medium-sized banks wanted to reduce their

issuances of negotiable certificates of deposit because of both the quota set by

the regulators, and their own intentions to actively adapt to regulation

measures, said the report, citing a source at a big joint-stock bank.

     It is necessary to adhere to a stable and neutral monetary policy and to

keep liquidity at a reasonable level, Premier Li Keqiang stated at the executive

meeting of the State Council, reported China Securities Journal. Although

liquidity stress is relatively high in some places and credit defaults are

occurring, these are not likely to result in liquidity risks, said the paper,

citing Cheng Shi, chief economist at ICBCI. It is possible for the PBOC to

conduct targeted required reserve ratio cuts once or twice in the second half of

the year while raising open market rates once, the newspaper said, citing Cheng.

The PBOC should control the intensity of monetary policy and the pace of

deleveraging to maintain balanced liquidity conditions, said Shen Jianguang,

chief economist of Mizuho Securities, according to the journal.

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

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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