MNI China Daily Summary: Thursday, December 3

EXCLUSIVE: The yuan could briefly strengthen to 6.4-6.5 to the dollar, but should mostly trade between 6.5 to 6.6 over the next six months as the world's second-largest economy faces headwinds, the interest spread with U.S. bonds narrows and the greenback recovers, a senior fellow at a Chinese government-sponsored think tank told MNI. To ease upward pressure on the yuan, the People's Bank of China could loosen controls on capital out-flows, such as by granting more quotas for qualified domestic investors to buy overseas assets, Zhang Ming, deputy director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said in an interview.

EXCLUSIVE: The People's Bank of China should not normalise policy too quickly and should closely monitor the risk of corporate debt defaults, a senior fellow at a Chinese government-sponsored think tank told MNI. Economic weakness persists amid China's recovery, while price indices, including CPI, core CPI and PPI, have shown signs of deflation, Zhang Ming, deputy director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, noted in an interview.

LIQUIDITY: The People's Bank of China (PBOC) injected CNY10 billion via 7-day reverse repos with rates unchanged at 2.2% on Thursday. This resulted in a net drain of CNY70 billion given the maturity of CNY80 billion repos today, according to Wind Information. The operation aims to maintain the liquidity in the banking system at a stable and ample level , the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 2.0171% from close of 1.8379% on Wednesday, Wind Information showed. The overnight repo average increased to 0.8873% from the previous 0.7432%.

YUAN: The currency strengthened to 6.5590 against the dollar from 6.5684 on Wednesday. The PBOC set the dollar-yuan central parity rate lower for a second day at 6.5592 compared with the 6.5611 set on Wednesday.

BONDS: The yield on 10-year China Government Bond was last at 3.2950%, up from Monday's 3.3110%, according to Wind Information.

STOCKS: The Shanghai Composite Index declined 0.21% to 3,442.14 The CSI300 index down 2% to 5057.06. Hang Seng Index increased 0.74% to 26728.50.

FROM THE PRESS: The PBOC should not tighten monetary policy until at least H2 next year given investment and consumption are still below expectations and companies face tight credit conditions after a string of bond defaults, said Sheng Songcheng, a former official with the central bank and now an advisor to the Shanghai government. If the PBOC quits easing, speculative international capital may accelerate the appreciation of the yuan and inflate import prices, said Sheng in a blog post.

China's five major state-owned banks are planning to inject capital into affiliated Asset Investment Companies (AIC) to satisfy regulatory needs to raise capital adequacy ratios from 2-3% to 5% this year, the Securities Times reported citing industry sources. According to the report the ratio will then increase to 6% in 2021 and 8% by 2022. The new regulatory standards will tighten banks' capital as AIC's main debt-for-equity business consumes capital, the newspaper said citing industry insiders. The current risk weight of 400% for non-public company equity and 250% for public company equity will not change, the Times report said.