MNI China Daily Summary: Thursday, May 16

     TOP NEWS: China has no information on further plan by the U.S. to visit

Beijing, said Gao Feng, spokesman of the Ministry of Commerce, after U.S.

Treasury Secretary Steven Mnuchin suggested another round of trade talk before

G20 summit in June. Should the U.S. go its own way to impose tariffs on $300

billion of Chinese goods, China will have to make necessary response, Gao said.

China is not afraid of any pressure and has the confidence, determination and

ability to deal with any challenges, he said. 

     TRADE: China and the U.S. should eventually strike a trade deal if the two

sides treat each other with mutual respect, a former Chinese Vice-Commerce

Minister told MNI in an interview, although he noted that there was no guarantee

previously-agreed commitments would be retained if stalled negotiations resume.

Wei Jianguo, who served as vice commerce minister from 2003-2008, said China

will tailor retaliation against threatened U.S. tariffs to minimise harm to its

own companies. "We will be tough as we retaliate, but we will precisely target

[specific sectors and groups]," Wei said adding that Chinese and U.S.

negotiators have not discussed when or how to resume talks, but that he still

expected a deal to be reached eventually.

     POLICY: The proactive fiscal policy this year has put a huge pressure on

China's balance sheet, and the central government has vigorously reduced general

expenditures and transferred more than CNY7.5 trillion to localities, the

largest transfer payment in recent years, wrote Minister of Finance Liu Kun in

Qiushi, a magazine run by the Communist Party of China. Local governments must

be conservative to ensure the implementation of a larger scale of tax and fee

cuts, Liu urged.

     YUAN: Chinese authorities should accept recent yuan depreciation as a valid

market reaction to the sudden breakdown of trade talks with the U.S., but the

currency will not fall far due to strict capital controls, a former member of

the People's Bank of China monetary policy committee China told MNI in an

interview. "The authorities should not curb the market move ... and a weaker

yuan benefits (China) more," said Yu Yongding, now a senior research fellow at

the Chinese Academy of Social Sciences. Large-scale capital outflows under

current regulations are unlikely, Yu said. "The trade account still remains in

surplus even though it is narrowing. As long as the capital account does not

show large outflows, the yuan exchange rate will not suffer a big fall."

     YUAN: The yuan weakened to 6.8821 against the dollar from Wednesday's close

of 6.8736. The PBOC set the dollar-yuan central parity rate higher at 6.8688,

compared with 6.8649 set on Wednesday.

     DATA: The average price of new homes in 70 major cities, excluding

subsidized units, increased 11.4% y/y in April, faster than the 11.3% growth

recorded in March and marked the biggest gain in 24 months, data released by the

National Bureau of Statistics showed. On a m/m basis, the average price was up

0.6% in April, the same as the increase reported in March.

     LIQUIDITY: The PBOC skipped open market operations for the sixth trading

day, leaving liquidity unchanged as no reverse repos matured, according to Wind

Information. Total liquidity in the banking system is at a reasonable and ample

level, according to the PBOC.

     RATES: The 7-day weighted average interbank repo rate for depository

institutions (DR007) fell to 2.5600% from Wednesday's close of 2.6102%, Wind

Information showed. The overnight repo average decreased to 2.2800% from

Wednesday's 2.5223%. 

     BONDS: The yield on 10-year China Government Bond was last at 3.2650%, down

from the close of 3.2700 on Wednesday, according to brokers.

     STOCKS: The benchmark Shanghai Composite Index rose 0.58% to 2955.71. Hong

Kong's Hang Seng Index edged up 0.02% to 28,275.07.

     FROM THE PRESS: China's monetary authority could use a "visible hand" to

regulate the foreign exchange market when necessary, the Economic Information

Daily said in a front-page commentary. The yuan is well supported by stable

economic fundamentals and decreasing forex sales by banks, and the authority is

capable of keeping the yuan stable at a balanced level, the newspaper said. The

"visible hand" is a key part of China's exchange rate formation mechanism, the

paper added.

     The PBOC aims to drain liquidity through the sale of CNY20 billion bills in

Hong Kong on Wednesday, said Economic Daily citing Zhao Qingming, chief

economist at China Financial Futures. The yuan is under great depreciation

pressure with abundant liquidity in offshore markets, Zhao said. While CNY20

billion is not a large amount, it did send a strong signal that the PBOC is

making it harder to short the yuan, the daily said citing Zhao.

     China's six major state-owned banks have been asked by regulators to

tighten the recognition of non-performing loans from the current 90 days to just

60 days, the 21st Century Business Herald reported citing an unnamed executive

at one of the banks. Citing another anonymous executive, the newspaper also

reported that although the requirements have not yet been documented, the strict

supervision is good for large banks and is conducive to the reduction of credit

risks.

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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