MNI China Daily Summary: Thursday, March 15

     TOP NEWS: China's central bank will likely keep the yuan in a narrow range

against the U.S dollar this year to help facilitate administration transitions,

MNI understands after speaking with sources close to the central bank and

traders at state-owned banks. The currency may trade between 6.3 and 6.5 against

the dollar this year, a senior source at the People's Bank of China told MNI.

Others echoed the view, predicting the currency won't repeat the high volatility

seen in the last two years, barring a sharp movement in the dollar.

     DATA: The People's Bank of China's foreign exchange purchase position rose

in February for a second straight month, reflecting a relatively balanced flow

of supply and demand, data released by the central bank showed. The PBOC's forex

purchase position on Feb. 28 rose by CNY4.051 billion from a month ago to

CNY21.48 trillion, according to a statement posted on its website on Wednesday.

February's relatively small gain was lower than January's CNY4.48 billion

increase, the data showed.

     ANALYSIS: China's industrial production recorded a strong start to 2018,

belying market expectations of a slow start, but it remains to be seen whether

the momentum can be retained. The strong industrial output was largely on the

back of a sharp rise of production in the electricity, heating, gas and water

production sector, which increased 13.3% y/y, affected by cold weather which

buoyed the production of electricity. Manufacturing sector output grew 7.0% y/y

in the two-month period, up from 6.5% in December and 6.9% same period last

year. This can be partly attributed to the Spring Festival factor as production

often picks up before the Lunar New Year Holiday and industry will gradually

pick up after the Holiday.

     LIQUIDITY: The PBOC injected CNY20 billion 7-day and CNY20 billion 28-day

reverse repos, with rates unchanged at 2.50% and 2.80%, respectively, according

to the Thursday morning update on the PBOC website. PBOC said the operation

aimed to cushion the impact of tax payments and to keep liquidity conditions

reasonable and stable. This resulted in a net injection of CNY40 billion as no

reverse repo matures today. CFETS-ICAP's money-market sentiment index closed at

39 on Wednesday, down from 45 on Tuesday.

     MONEY MARKET RATES: The average 7-day repo rate dropped to 2.8668% from the

2.8737% on Wednesday, after PBOC injected CNY40 billion via its open-market

operations. The overnight repo average was down to 2.6180% from Wednesday's

2.6213%.

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

daily fixing. The yuan climbed 0.01% to 6.3157 against the U.S. unit from the

official closing price of 6.3162 yesterday. The People's Bank of China set the

yuan central parity rate vs the U.S. dollar at 6.3141 on Thursday, stronger than

Wednesday's 6.3205. Today is the fourth straight day the central bank has set

the parity stronger.

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

3.8500%, down from the previous close of 3.8525%, according to Wind Information.

     STOCKS: Stocks were barely changed in Shanghai, with coal gas company

shares down and railway transportation companies up. The benchmark Shanghai

Composite Index closed down 0.01% AT 3,291.11. Hong Kong's Hang Seng Index

gained 0.32% to 31,534.77.

     FROM THE PRESS: China should introduce bankruptcy laws for financial

institutions to keep financial operations in order and to prevent financial

risks, reported Shanghai Securities News, quoting Bai Hexiang, the head of Xi'an

branch of the People's Bank of China. For example, it would be useful to

institute a rule ensuring that a bank frequently going below a 'standard'

capital adequacy ratio will be forced to go bankrupt, reducing the financial

risks brought on by that bank, Bai said.

     It is uncertain if the PBOC will roll over maturing Medium-term Lending

Facilities (MLF) on Friday, as the PBOC can minimize the impact of maturing MLF

loans by using reverse repo; and it may instead conduct MLF with increased rates

after a very possible rate hike by the U.S. Fed on March 22, reported China

Securities Journal. As the market generally expects PBOC to raise its open

market operations and MLF rates, the potential rate hike will not cause much

fluctuation in the financial system, the report said.

     Personal income tax reform, which will include increasing the minimum

threshold and adding special fee deductions, will come into effect as early as

the second half of this year, reported Securities Journal, citing multiple

analysts. The effective date will likely fall at any time between September and

December, according to analysts' predictions.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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