MNI China Daily Summary: Tuesday, August 29

     TOPS NEWS: The People's Bank of China injected CNY50 billion in seven-day

reverse repos via open-market operations Tuesday, resulting in a net injection

of CNY10 billion for the day, as a total of CNY40 billion in reverse repos

matured. Today's net injection is the first via OMOs after the PBOC drained

liquidity via OMOs each of the previous six trading days. The CFETS-ICAP

money-market sentiment index ended at 64 on Monday, well above the reading of 37

at Friday's close. The higher the reading, the worse the liquidity conditions in

the interbank market.

     RATES: Money market rates were higher on Tuesday after the PBOC injected a

net CNY10 billion via open-market operations. The seven-day repo average was

last at 2.9099%, higher than Monday's average of 2.8961%. The overnight repo

average was at 2.9482%, compared with Friday's 2.8700%.

     YUAN: The yuan strengthened against the U.S. dollar Tuesday after the

People's Bank of China set a stronger daily fixing. The yuan was last at 6.6023

against the U.S. unit, rising 0.45% compared with the official closing price of

6.6323 on Monday. The People's Bank of China set the yuan central parity rate

against the U.S. dollar at 6.6293 on Tuesday, stronger than Monday's 6.6353.

     BONDS: The yield on benchmark 10-year China government bonds was last at

3.6106%, down from the previous close of 3.6204%, according to Wind, a financial

data provider.

     STOCKS: Stocks rose, led higher by the ceramics sector. The benchmark

Shanghai Composite Index closed up 0.08% at 3,365.23. Hong Kong's Hang Seng

Index was 0.10% lower at 27,836.74.

     FROM THE PRESS: As the Chinese interbank market celebrates its 20th

anniversary, China will stick to its plan for improving the interbank bond

market, Pan Gongsheng, deputy governor of the People's Bank of China, told the

Financial News in an interview published Tuesday. The PBOC needs to stabilize

market expectations by providing a stable and predictable policy environment for

market participants, speed up the development of new bond market products,

continue to introduce new innovative derivatives to enhance investment tools,

and improve the trading system. He stressed the need for additional controls on

risk. (Financial News)

     Experts say the yuan exchange rate will remain relatively stable but could

continue its periodic strengthening against the dollar seen recently, the

Economic Information Daily reported Tuesday. An analyst from the Bank of China

International Finance Research Center told the newspaper the rise of the yuan

was due to China's strong economic fundamentals, the weakening of the dollar,

the recent strengthening of controls on Chinese companies' cross-border capital

outflows, and the introduction of the counter-cyclical adjustment factor in the

PBOC's daily parity calculation. Han Huishi, a well-known yuan analyst, was

quoted as saying the PBOC's recent actions have made the market believe the

Chinese government will maintain the basic stability of the yuan in the medium

to long term. But Han pointed out that only yuan depreciation expectations have

dropped, which does not mean that projections for yuan strengthening have become

dominant. (Economic Information Daily)

     The issuance of treasury bonds should be the main method for local

governments to raise new funding and so alleviate the need for illegal

financing, the Economic Information Daily said in a commentary Tuesday. The

recent rapid expansion of financing by local governments is due to their need to

invest in local infrastructure, the costs of which are difficult for them to

repay given the lack of support from fiscal revenue, the report said. This has

prompted local governments to use illegal financing methods. The newspaper

stressed that preventing illegal local government financing does not mean

abandoning infrastructure improvements nor giving up on local governments'

function in boosting economic growth, but rather redirecting financing to legal

methods, such as the issuance of treasury bonds. (Economic Information Daily)

     Three central state-owned enterprises have said they would establish or

expand corporate treasury centers in Hong Kong, while 30 others are considering

the option, Norman Chan Tak-lam, chief executive of Hong Kong Monetary

Authority, said Monday in an article published on the authority's website. The

official said the three SOEs are: China Huaneng Group; State Power Investment

Corporation; and China Three Gorges Corporation. He attributed their move to a

tax rule change last June, when the Hong Kong government reduced by 50% the

profits tax rate for specified activities of qualified corporate treasury

centers. (South China Morning Post)

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

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

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