MNI China Daily Summary: Thursday, November 1

     TOP NEWS: China's central bank retained an ample liquidity stance in

October as stock and forex markets suffered levels of volatility hardly seen in

years. The latest MNI China Interbank Liquidity Survey shows the percentage of

traders seeing liquidity conditions as improved rising to 46.7%, up from 44.4%

last month, and no participants said liquidity has been tight, in the second

zero reading for deteriorating conditions this year.

     LIQUIDITY: The People's Bank of China (PBOC) skipped open market operations

(OMOs) for a fifth consecutive trading day Thursday, resulting in a net

liquidity drain of CNY100 billion on account of maturing reverse repos,

according to Wind Information. The central bank said on its website that current

banking system liquidity is relatively high and is sufficient to offset the

impact of maturing reverse repos and other factors. The 7-day weighted average

interbank repo rate for depository institutions (DR007) decreased to 2.6451%

from Wednesday's close of 2.7098%, Wind Information showed. The overnight repo

average increased to 2.5406% from Wednesday's 2.3928%.

     YUAN: The yuan appreciated to 6.9496 against the U.S. dollar from

Wednesday's close of 6.9734. The PBOC set the yuan central parity rate weaker

for a third straight day at 6.9670 on Thursday, following Wednesday's 6.9646.

Today's fixing is the weakest since May 20, 2008.

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

3.4925%, down from 3.5100% on Wednesday, according to Wind Information.

     STOCKS: The benchmark Shanghai Composite Index closed 0.13% higher at

2,606.24. Hong Kong's Hang Seng Index increased 1.75% to 25,416.00.

     FROM THE PRESS: Markets are only pricing in "moderate" yuan depreciation

compared to the 2015-2016 period, when one-year NDF contracts implied expected

depreciation of between 4-5%, Guan Tao, a fellow at the China Finance 40 Forum

think tank, wrote in Thursday's Shanghai Securities News. Yuan-dollar settlement

data for Feb-Sept showed dollar demand actually dropped from last year, Guan

said. Moreover, the recent weakening of the yuan is in line with the

strengthening dollar trend and domestic economic fundamentals, he added. Even if

the yuan breaches 7 against the dollar, regulators have policy tools which would

allow them to stabilise market expectations, Guan said.

     --MNI COMMENT: Guan, a former official at the PBOC, appears to be hinting

to the central bank that it should prepare for a scenario in which USD/CNY

breaches 7. Indeed, in the Shanghai Securities News story, he stresses the

importance of the authorities acting swiftly and decisively in order to

effectively guide market expectations. (Link to the story:

https://bit.ly/2DfFNCo)

     China's economic growth may start to re-accelerate at the turn of the year,

Zhang Liqun, a researcher at the Development Research Centre of the State

Council told Shanghai Securities News. While the manufacturing PMI declined for

a second straight month in October, thus signalling some short-term pressure,

China's economic fundamentals have improved significantly and the government has

sufficient tools at its disposal to stabilise and support the economy. (Link to

the story: https://bit.ly/2JuFrYX)

     China's banks should employ the principle of "competitive neutrality" -

i.e. treating state-owned enterprises (SOEs) and private companies equally when

extending credit, the Financial News reported Thursday, citing several

high-ranking Chinese officials. SOE's should not benefit from explicit or

implicit state guarantees when applying for debt financing, the officials told

the paper. (Link to the story: https://bit.ly/2RqvfDy)

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

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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