MNI China Daily Summary: Thursday, May 23

     TRADE: China's Ministry of Commerce restated today that Washington should

stop trying to impose extended jurisdiction to suppress Chinese companies. China

is against any other nations that willfully impose sanctions on Chinese

companies or individuals according to their own laws, MOFCOM spokesman Gao Feng

said, urging the U.S. to stop its "wong actions" and create conditions for

normal trade and cooperation between the two countries.

     TRADE: China-U.S. trade and economic frictions could last for years, with

the two sides not returning to a more cooperative state until 2035, a Chinese

government economist said Wednesday. Over the next two decades, the dispute

would be ongoing although negotiations would continue, Zhang Yansheng, a senior

researcher for the National Development and Reform Commission told reporters.

Both countries will sound each other out over the next few years, with 2021

through 2025 being the most difficult period as bilateral conflicts in economy,

trade, tech and finance increase. Relations will gradually improve between 2025

and 2035, Zhang said.

     POLICY: China is unlikely to make major changes to its managed exchange

rate policy, James Bullard, president of the St. Louis Federal Reserve told MNI

on the sidelines of an MNI Roundtable dinner in Hong Kong Wednesday. "I think

they'll be very careful here, they have a lot of reserves and they don't really

have any incentive to deviate from their past policy, I think anything that they

do will be a tweak," Bullard said, noting how international markets had turned

on economies with managed exchange rates in the past. Bullard added that he

would not rule out a rate cut later this year to try to cement inflation

expectations around 2%. "It is a possibility if the inflation data continue to

come in soft," he said.

     PBOC: Allowing the creation of more Chinese banks would be a more efficient

way of helping private and smaller companies in the event of any further

economic slowdown or trade troubles than additional monetary easing, a People's

Bank of China (PBOC) official told MNI. Existing banks prefer to lend to

government entities and state-owned enterprises, said the official, who asked

not to be identified, calling for the government to grant licences to new

institutions to prompt more competition in the sector. "It's very simple, the

government should expand market access, give more licenses," the official said.

     LIQUIDITY: The PBOC skipped open market operations (OMOs), 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 2.6000% from Wednesday's close of 2.6716%, Wind

Information showed. The overnight repo average decreased to 2.5800% from

Wednesday's 2.6176%.

     YUAN: The yuan weakened to 6.9190 against the dollar from Wednesday's close

of 6.9040. The PBOC set the dollar-yuan central parity rate higher again at

6.8994, compared with 6.8990 set on Wednesday. Today's parity rate is the

highest since Dec 24, 2018.

     YUAN: The PBOC is confident that it's able to keep the yuan exchange rate

stable at a balanced level in the near future, even as the yuan comes under

depreciation pressure due to the trade tension with the U.S., Liu Guoqiang,

deputy governor of the central bank said in an interview with the PBOC-run

newspaper the Financial News today. There's been overshooting of the exchange

rate, but the FX market is stable, and the PBOC won't allow "anything to

happen", Liu told the newspaper.

     YUAN: The PBOC has shown stronger intentions to guide the yuan exchange

rate in the past two weeks, as shown in plans for a new sale of central bank

bills, according to the Economic Daily. That the PBOC plans to sell bills just

one week after it had sold CNY20 billion on May 15 showed the central bank's

resolve, the newspaper said. The sales could stabilize the offshore yuan

exchange rate and help combat short selling and arbitrage, the newspaper said

citing E Yongjian, chief financial analyst at the research center of the Bank of

Communications.

     BONDS: The yield on 10-year China Government Bond was last at 3.2950%, down

from the close of 3.3100 on Wednesday, according to Wind Information.

     STOCKS: The benchmark Shanghai Composite Index fell 1.35% to 2852.52.

Domestic operating system and chip shares buck the downward trend with some

hitting the limit up, while 5G and surveillance equipment stocks retreated,

according to Wind Information. Hong Kong's Hang Seng Index dropped 1.58% to

27,267.13.

     FROM THE PRESS: China should promote the opening of local A-share index

derivatives now to draw overseas investment as foreign investors hedging risks

currently have a strong demand for yuan assets, said Xinhua News Agency citing

Guan Tao, former director of the International Payments Department at the State

Administration of Foreign Exchange.

     China's Ministry of Finance aims to boost market confidence by offering

five-year tax breaks to domestic chip makers, according to a report in Quanshang

Zhongguo, an online publication affiliated with the Securities Times. Amid

escalating trade tension with the U.S., eligible chip design and software firms

will be exempt from corporate income taxes for two years and their taxes will be

halved in the following three years, according to the statement by the Ministry

on Wednesday night. While the U.S. is weighing the blacklisting of more Chinese

firms sourcing U.S. chips, Japanese exports of semiconductor parts to China

shrank sharply in April, the publication said.

     The average residential home price in China is expected to gain 7.6% this

year after rising 12.2% last year, the China News Service reported citing a

report by the the Chinese Academy of Social Sciences. Prices in some key cities

will significantly exceed this expected level, the newspaper said.

--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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