MNI China Daily Summary: Thursday, May 24

     TOPS NEWS: Continuing North Korean issues affect the ongoing negotiations

over trade between the U.S. and China, a Ministry of Commerce official told MNI.

Comments from U.S. President Donald Trump on Tuesday, saying he isn't satisfied

with the China-U.S. trade talks, were triggered by North Korea's harder stance

in recent days, the official said. Trump's comments contrast with positive

sentiment expressed by Chinese and American officials last week following their

meetings in Washington, D.C. "China and the U.S. only reached a consensus, and

the two countries will continue to negotiate," the official told MNI. "China may

not have offered (extra) benefits to the U.S." Mei Xinyu, a researcher at the

Chinese Academy of International Trade and Economic Cooperation under the

Ministry of Commerce, told MNI behind the scenes during the trade talks last

week. "China might showcase its ability to retaliate against the U.S. in other

areas such as politics," he noted.

     TOP NEWS: China will welcome U.S. officials including Commerce Secretary

Wilbur Ross as they visit for another round of trade talks next week, and it

hopes the two countries can work together to implement the agreement reached in

Washington last week, the Ministry of Commerce said Thursday at a regular

briefing. China defended its core interests in the Washington discussions and

did not promise to cut any specific amounts of trade surplus with the U.S., said

Gao Feng, spokesman of the ministry. China insists on increasing imports in the

long term and welcomes products from other countries including the U.S., but the

country will do it according to market rules, Gao said. China and the U.S. can

complement each other well and have great potential for further cooperation, he

noted. One of the key tasks for Chinese government departments this year is the

revision of patent law, Gao stressed.

     LIQUIDITY: PBOC injected CNY20 billion and CNY20 billion in 7-day and

14-day reverse repos on Thursday, respectively, with rates unchanged at 2.55%

and 2.70%, the central bank said on its website. This resulted in an unchanged

liquidity condition as a total of CNY40 billion in reverse repos matured today.

CFETS-ICAP's money-market sentiment index closed at 35 on Wednesday, down from

36 on Tuesday.

     ANALYSIS: China's lower M1 growth in recent months suggests financing

pressures for companies, imposing downward pressure on future economic growth.

Since February, China's M1 growth, including M0 and companies' demand deposits,

has been lower than M2 growth, causing concern over growth prospects for the

economy. Some analysts view the lower M1 growth compared with M2 growth as a bad

sign for growth prospects, as it suggests companies have less intention to

invest, thus keeping less money in their checking account. However, a breakdown

of M2 growth data shows little evidence of corporates' investment intentions

fading, and  actually indicates a decline in the funding companies received.

     MONEY MARKET RATES: 7-day repo average rose to 2.6932% from 2.6857%

Wednesday, after the PBOC OMO operation balanced out with the same amount of

maturities. The overnight repo average decreased to 2.5168% from Wednesday's

2.5131%.

     YUAN: The yuan fell to 6.3881 against the U.S. dollar from Wednesday's

closing of 6.3852. Earlier today, the PBOC set the yuan central parity rate at

6.3816 Thursday, weaker than Wednesday's 6.3773.

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

3.6425%, up from the previous close of 3.6300%, according to Wind Information.

     STOCKS: Shares declined in Shanghai, led lower by motorcycle companies,

with Qjiang Motor Co., Ltd. down by more than 3%. The benchmark Shanghai

Composite Index closed 0.45% lower at 3,154.65. Hong Kong's Hang Seng Index

gained 0.13% to 30,706.31.

     FROM THE PRESS: A series of measures to encourage an upgrade in consumption

are to be published, and will include expanding the import of middle- and

high-end products, and encouraging information and auto consumption, reported

Shanghai Securities News, citing anonymous sources from Ministry of Commerce.

Consumption growth will remain around 10%, and retail sales will amount to

nearly CNY4 trillion this year, the report said, citing Zhao Ping, the Director

of International Trade Research Department of China Council For The Promotion of

International Trade Academy.

     Banks have recently increased their certificates of deposit (CD) rates to

40%-50%, in some cases even 55%, above the benchmark, reported Economic

Information Daily. This is directly related to the PBOC's decision to proceed

with interest rate liberalization reform, which causes the upward floating limit

of CD rates to increase, the report said. Rising CD rates show that pressure on

banks to get deposits has increased, said the report, citing Lu Zhengwei, the

chief economist at China Industrial Bank. ***Comment: The CD interest rate

ceiling, determined by market interest rate pricing, has been relaxed under the

guidance of the PBOC from 40%, 42% and 45% higher than the benchmark CD rates -

for the 'big four' state banks, larger private stock-holding banks, and small

regional banks, respectively - to 50%, 52% and 55% higher than benchmark rates.

     Combining the market rate and benchmark rate is an imminent problem in

interest rate liberalization reform, and regulators need to watch out for the

potential impact of a too-quickly rising deposit rate and a large withdrawal of

wealth management products, reported China Securities Journal. Interest rate

liberalization will proceed more smoothly when there is abundant funding, which

could prevent banks from competing for deposits by significantly raising their

deposit rates, the report said, citing Pan Xiangdong, the chief economist at New

Times Securities. In addition, the benchmark rate and market rate should only be

combined when the difference between the two is reasonably small, the report

said, citing Pan.

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

--MNI Beijing Bureau; +86-10-8532-5998; email: beijing@marketnews.com

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