MNI China Daily Summary: Thursday, November 19

EXCLUSIVE: China is set to allow more struggling state-owned companies to default or even go bankrupt, forcing investors to re-evaluate assumptions of local government backing for their debt, but authorities will limit failures to out-of-favour sectors such as heavily-polluting industry and be careful to control their pace in order to avoid generating systemic risk, policy advisors told MNI.

POLICY: China and the EU are accelerating negotiations to their planned Investment Agreement through continuous and intensive talks, aiming to complete negotiations within the year, Gao Feng, spokesman of the Ministry of Commerce said today, adding that Beijing was also willing to push on with talks towards to a free trade agreement.

POLICY: China's financial industry should hasten the disposal of non-performing assets, prevent a resurgence of high-risk shadow banks and steadily expand the sector's opening to outside investment, Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission, wrote in an article on the central bank's website. Banks should also formulate realistic income and profit plans, as well as increasing provisions and capital replenishment, Guo said.

LIQUIDITY: The People's Bank of China (PBOC) injected CNY70 billion via 7-day reverse repos with rates unchanged at 2.2%. This resulted in a net drain of CNY50 billion given the maturity of CNY120 billion of reverse repos today, according to Wind Information. The operations aim to maintain the liquidity in the banking system reasonable and ample, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) rose to 2.2286% from close of 2.1880% on Wednesday, Wind Information showed. The overnight repo average increase to 1.9062% from the previous 1.7189%.

YUAN: The currency weakened to 6.5851 against the dollar from 6.5425 on Wednesday. The PBOC set the dollar-yuan central parity rate lower at 6.5484, compared with the 6.5593 set on Wednesday.

BONDS: The yield on 10-year China Government Bond was last at 3.3400%, up from Wednesday's 3.3200%, according to Wind Information.

STOCKS: The Shanghai Composite Index rose 0.47% to 3,363.09 while the CSI300 index increased by 0.74% to 4,927.99. Hang Seng Index lost 0.71% to 26,356.97.

FROM THE PRESS: China's central government is seeking to raise domestic consumption by asking local authorities to reduce limits on car purchases, increase the release of license plates and subsidize the replacement of old cars, according to a readout from the State Council executive meeting on Wednesday. The State Council is also seeking to incentivize the replacement of home appliances and furniture with environmentally friendly new ones, The statement also said the government is calling for the development of "Internet + Tourism" to expand the tourism market, including building smart tourist attractions and encouraging scenic spots to increase their online marketing efforts. The government is also urging officials to deepen reform and speed up the implementation of the Regional Comprehensive Economic Partnership.

China needs to raise the proportion of direct financing from capital markets, particularly equity financing, to avoid an excessive reliance on bank borrowing, the Securities Daily reported citing an article by PBOC Governor Yi Gang. Bank loans currently play the major role in financing China's real economy, placing large risks on banks, and this is not an efficient use of financial resources, Yi said. China will implement the stock issuance registration system and establish a normalized delisting mechanism, the Daily reported citing the government's 2021-2025 Plan.

The province of Shanxi has vowed to restructure the debts and liabilities of its local state-owned companies and avoid adding risk to financial institutions, said Vice Governor Wang, according to an official WeChat blog. Wang was commenting after a bond default by Yongcheng Coal Group, an SOE in the neighboring Henan province, roiled the market this month and drew scrutiny over China's ageing domestic coal miners. Wang stressed that Shanxi, a province with a high concentration of coal mines. will increase securitization by SOEs and implement digitized management systems to aid with clearance, reduce costs and increase efficiency, and balance the ratio of assets to liabilities. The aim was to limit an escalation of debt among SOEs.