MNI China Daily Summary: Tuesday, August 15

EXCLUSIVE: The People’s Bank of China (PBOC) will need to provide incentives such as targeted reserve requirement ratio cuts if it is to persuade banks with squeezed interest margins to heed its recent call to lower rates on existing residential mortgages, advisors and analysts told MNI.

POLICY: The PBOC unexpectedly cut two key policy rates for a second time in three months, as recent disappointing financial and economic indicators pointed to stronger headwinds. The central bank cut the rate of one-year medium-term lending facility by 15bp to 2.5% when rolling over the maturing CNY400 billion MLF with a renewed CNY401 billion facility. It also lowered the rate on the 7-day reverse repo rate by 10bp to 1.8%, while injecting a net of CNY198 billion via the instrument.

DATA: China's production, consumption and investment slowed more than expected in July despite efforts to boost domestic demand, data released by the National Bureau of Statistics showed. Industrial production rose 3.7% y/y in July, underperforming the 4.3% forecast and decelerating from June's 4.4%. Retail sales increased 2.5% y/y in July to hit the lowest level this year, missing expectations for 3.8% and slowing from June's 3.1%. Fixed-asset investment in Jan-July period registered a 3.4% y/y increase, the lowest since December 2020, slower than both the 3.8% growth in H1 and lower than the 3.8% consensus.

LIQUIDITY: The PBOC conducted CNY204 billion via 7-day reverse repos and CNY401 billion via 1-year MLF on Tuesday, with the rates lowering to 1.80% and 2.50%, respectively. The operation has led to a net injection of CNY199 billion after offsetting the maturity of CNY6 billion reverse repo and CNY400 billion MLF today, according to Wind Information. The operation aims to hedge the impact during tax payment period and to keep banking system liquidity reasonable and ample, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 1.8815% from 1.8231%, Wind Information showed. The overnight repo average rose to 1.7767% from 1.6910%.

YUAN: The currency weakened to 7.2868 against the dollar from 7.2537 on Monday. The PBOC set the dollar-yuan central parity rate higher at 7.1768, compared with 7.1686 set on Monday.

BONDS: The yield on 10-year China Government Bonds was last at 2.6325%, down from Monday's close of 2.6675%, according to Wind Information.

STOCKS: The Shanghai Composite Index edged down 0.07% to 3,176.18, while the CSI300 fell 0.24% to 3,846.54. The Hang Seng Index lost 1.03% to 18,581.11.

FROM THE PRESS: The PBOC may move to stabilize the yuan should the currency weaken further and breach 7.3 against the U.S. dollar. The PBOC is likely to increase the risk reserve requirement on FX forward sales, which will increase the cost of FX sales, said Yang Yiping, macro researcher at Galaxy Futures. Yang said the FX reserve requirement ratio also has room for downward adjustment. The PBOC has cut the RRR to 6% from 8% since September 2022, while the rate was once as low as 3% historically, Yang added. Onshore and offshore yuan fell to 7.26 and 7.29 on Monday respectively, both hitting the weakest level since June 30. (Source: 21st Century Business Herald)

The PBOC intends to support consumer finance firms and automobile finance companies in issuing financial bonds and asset-backed securities (ABS) to raise funds for developing new consumer credit products, financial news agency Cls.cn has reported, citing anonymous sources close to the central bank. The first batch of eight companies including Merchants Union Consumer Finance, BOC Consumer Finance, Zhongyou Consumer Finance and BYD Auto have initially communicated with CICC, CITIC Securities, and CMSC to issue around CNY50 billion of bonds and ABS. (Source: Cls.cn)

China should consider abolishing stamp duty tax on A-share trading to re-activate the stock market following Hong Kong Securities Industry’s calls for removing taxes on H-shares, said Beijing Business Today in a commentary. According to the newspaper, stamp duty is no longer required to suppress speculation as stock prices are generally stable after the registration-base reform and the tax has not curbed excessive income in a market where retail investors have mainly lost money.