MNI China Daily Summary: Tuesday, August 6

     EXCLUSIVE: China's central bank may allow the yuan to fall further past the

7-to-the-dollar level if the U.S. plays tough in trade talks, but depreciation

should be limited for now and authorities could step in to stop any heavy

selling should it threaten financial markets or trigger capital outflows, policy

advisors told MNI. China could allow the yuan to fall under market pressure to

compensate for the effect of the tariffs on its exports, said Zhang Ming, a

senior fellow at the Institute of World Economic and Politics under the Chinese

Academy of Social Sciences, although he expected the currency to remain near 7

in the short term in the absence of further escalation from the U.S.

     TRADE: China "deeply regrets" the U.S. government's decision to label it a

"currency manipulator", denies that it has used exchange rate as a weapon to

fight the trade war and reiterates it will keep the yuan basically stable. The

decision by the U.S. Department of Treasury on Aug 6 was a "reckless

unilateralist and protectionist" move that wasn't in accordance with the

Treasury's own quantitative standard and "seriously violated global rules," the

People's Bank of China (PBOC) said in a statement on its website today.

     BONDS: The PBOC will sell CNY30 billion offshore yuan-denominated bills in

Hong Kong on Aug 14, including CNY20 billion 3-month bills and CNY10 billion

1-year bills.

     LIQUIDITY: The PBOC skipped open market operations (OMOs) for an 11th

straight day, leaving liquidity unchanged, according to Wind Information.

Liquidity in the banking system is reasonable and ample, the PBOC said.

     RATES: The 7-day weighted average interbank repo rate for depository

institutions (DR007) fell to 2.4312% from Monday's close of 2.5885%, Wind

Information showed. The overnight repo average decreased to 2.2559% from 2.5258%

on Monday.

     YUAN: The yuan strengthened to 7.0321 against the U.S. dollar from Monday's

close of 7.0352. The PBOC set the dollar-yuan central parity rate up to 6.9683

from 6.9225 on Monday.

     BONDS: The yield on the 10-year China Government Bond was last at 3.0600%,

up from Monday's close of 3.0550%, according to Wind Information.

     STOCKS: The benchmark Shanghai Composite Index fell 1.56% to 2,777.56. Hong

Kong's Hang Seng Index decrease 0.67% to 25,976.24.

     FROM THE PRESS: The U.S. should take full responsibility for Chinese

companies halting new purchases of U.S. agricultural products as U.S. actions

were contrary to the consensus reached at the G20 summit in Osaka, the Xinhua

News Agency said in a commentary. China's Customs Tariff Commission of the State

Council refused to extend exemptions on extra tariffs on U.S. agricultural

products after Aug 3, while some Chinese companies had suspended purchases of

U.S. farm products.

     Chinese government bonds are still attractive to investors despite the yuan

breaking through seven against the U.S. dollar, the China Securities Journal

reported. The 100 bps spread between the same-term government bonds of China and

the U.S. continued to make the Chinese bonds attractive, the journal cited

analysts as saying. The PBOC is expected to prevent the yuan from depreciating

sharply, the newspaper said, adding that the yuan is also well supported by

economic fundamentals.

     The Chinese yuan will remain stable in the near term and trading companies

should use appropriate tools to hedge currency risks, the China Business News

reported late Monday citing Sheng Songcheng, a former director of the Survey and

Statistics Division of the PBOC. While the yuan may depreciate against the

dollar, it remains stable against a basket of currencies, Sheng was cited as

saying.

The yuan breaking 7 against the dollar marks a big step towards a flexible

exchange rate system and shows decision makers have overcome a long-time mental

barrier and will have more courage to further let the yuan float, the People's

Daily reported on its official WeChat account Xiakedao citing Xu Qiyuan, a

researcher at the Chinese Academy of Social Sciences. The central bank has shown

a higher level of tolerance for the movement of exchange rate after the yuan's

historical move, the People's Daily said. Yuan's fluctuation helps adjust

China's global balance of payment and the forex market will find its own

balance, the newspaper said. 

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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