MNI China Daily Summary: Tuesday, August 28

     TOP NEWS: USDCNH implied volatility plunged on Tuesday, with 1-month vol

dropping 4.2bps to one-month lows. The 30-day rolling correlation between USDCNH

and 1-month USDCNY vol remains elevated at 0.79, from as high as 0.96 two weeks

ago. This tight correlation bodes well for further declines in the yuan,

particularly given that the vol curve remains inverted, which has typically

pointed to turning points in the pair.

     LIQUIDITY: The People's Bank of China injected CNY70 billion via its 7-day

reverse repos, CNY20 billion via its 14-day reverse repos, and CNY10 billion via

28-day reverse repos on Tuesday, resulting in a net injection of CNY50 billion

as a total of CNY50 billion reverse repos matured today, according to Wind

Information. A total of CNY170 billion in reverse repos will mature this week.

CFETS-ICAP's money-market sentiment index closed at 35 on Tuesday, up from 30 on

Monday.

     YUAN: The yuan strengthened to 6.8110 against the U.S. dollar from Monday's

close of 6.8171. The PBOC set the yuan central parity rate at 6.8052. Today's

fixing was 0.66% up on Monday's 6.8508, the biggest daily jump since Jun 1,

2017.

     YUAN: USDCNH eased from intraday highs to trade at around 6.8080 as of

14:10 Beijing time. The pair held below support-turned-resistance at the 21-dma

as the 55-dma at 6.7242 comes into focus. This comes despite a renewed drop in

2-year interest rate swaps, which have edged down 1bp to trade at 2.91%. Yields

are being capped by the 55-dma at 2.9635. Chinese stocks are coming under

pressure as the 55-dma caps gains in the HSI and the CSI 300 fails to overcome

the July 10 highs at 3424. Overall the process of Chinese assets bottoming out

remains in place, but headline risk is likely to keep market volatility

elevated.

     MONEY MARKET RATES: The benchmark 7-day deposit repo average dropped to

2.6330% on Tuesday from 2.6375% on Monday; the overnight average decreased to

2.4015% from 2.4202% on Monday: Wind Information.

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

3.6150%, down from the previous close of 3.6300%, according to Wind Information.

     STOCKS: Shares in Shanghai declined slightly on Tuesday, with the Shanghai

Composite Index closing 0.11% lower at 2,777.98. Hong Kong's Hang Seng Index

rose by 0.28% to 28,349.08.

     FROM THE PRESS: The likelihood of the yuan exchange rate dropping to the

7.0 level is decreasing, as recent countercyclical adjustments indicate that

policymakers are approaching their "bottom line", China Securities Journal

reported. If the yuan weakens further, the PBOC's "macro-prudential management"

will likely increase accordingly, the newspaper said, indicating that the

central bank would take measures to prevent the yuan from dropping below 7.0.

     Hohhot City, the capital of Inner Mongolia, has announced that it will

suspend real estate destocking measures, China Business News reported. The move

aims to regulate house prices and stabilise the property market, the newspaper

said, citing the Housing Security and Housing Administration of Hohhot. Measures

to increase the supply of land and units will be accompanied by a clampdown on

property developers' illegal practices, the regulator said. **COMMENTS: Hohhot

is the first city in China to stop its inventory reduction campaign. This could

signal similar action in other parts of the country.

     Recent events highlight the growing urgency that Beijing improves its

regulation of China's risky rental market, the Economic Daily reported. Dingjia,

a long-term rental apartment operator, declared bankruptcy last week, leaving

around 4,000 tenants facing financial losses. The company has been using

tenants' credit to fund its expansion, in line with a wider unscrupulous

practise whereby housing agents and online lending platforms colluded to get

tenants to take out loans unknowingly.

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

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

[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]