MNI China Daily Summary: Tuesday, December 12

     TOP NEWS: Chinese financial leverage to support economic growth will

continue to increase but at a slower pace in the period ahead, while the

consolidation of political power during the 19th Communist Party Congress will

advance reform and rebalancing of its economy, Moody's Investor Service said

Tuesday. However, it's unclear whether the centralization of political power in

Beijing will cause economic reforms to speed up or not, the ratings agency said.

China is seeing returns on investment drop, with the rise in the capital-output

ratio (ICOR) -- a metric measuring a country's production efficiency, with a

higher reading meaning less efficient investment -- a potential danger sign.

Moody's noted it maintains stable outlook for the Chinese banking sector,

including aspects of the operating environment, asset quality, and government

support, but that liquidity and profitability in the sector are "deteriorating."

     TOP NEWS: The People's Bank of China should combine hikes in the interest

rates on its open market instruments with a targeted required reserve ratio cut

to meet the goal of preventing major financial market risks, the Securities

Times said in a front page commentary Tuesday. Money market rates have a

structural problem-- the spread between money market rates and open market

operation rates remains large, so the PBOC should raise its OMO rates following

the Federal Reserve's expected rate hike this week to smooth the monetary policy

transmission mechanism, the commentary argued. The tightness of liquidity will

get worse under pressure from the regulatory squeeze on interbank transactions

and rising market rates, so it is necessary to conduct a targeted RRR reduction

to make up the liquidity gap, particularly for small and medium-sized banks, the

commentary proposed. (Securities Times) 

     RATES: Money market rates were up as liquidity tightened with the approach

of year-end. The seven-day repo average was last at 2.8961%, up from Monday's

average of 2.8706%. The overnight repo average was at 2.7460%, above Monday's

2.6923%.

     LIQUIDITY: The People's Bank of China injected CNY80 billion in seven-day

reverse repos and CNY70 billion in 28-day reverse repos via open-market

operations Tuesday, Wind Information, a Shanghai-based financial data provider,

said. This resulted in a net injection of CNY40 billion for the day, as a total

of CNY110 billion in reverse repos mature on Tuesday.

     YUAN: The yuan was weaker against the U.S. dollar on Tuesday after the

People's Bank of China set the fixing rate slightly weaker for the day. The yuan

was last at 6.6210 against the U.S. unit after opening at 6.6171, compared with

the official closing price of 6.6173 on Monday. The PBOC set the yuan central

parity rate at 6.6162, slightly weaker than Monday's 6.6152.

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

3.9600%, up from the previous close of 3.9450%

     STOCKS: Stocks were down, led lower by the shares of insurances and

securities companies. The benchmark Shanghai Composite Index closed down 1.25%

at 3,380.81. Hong Kong's Hang Seng Index was 0.44% lower at 28,837.86.

     FROM THE PRESS: The volatility of the yuan exchange rate is expected to

increase to a range of 6.4 to 6.8 against the U.S. dollar in 2018, the Economic

Information Daily said in its front page commentary on Tuesday. The greenback

will weaken further as the Federal Reserve continues its rate hike cycle while

the market expectation on the European Central Bank's withdrawal from its

quantitative easing program and rate hikes is likely to form in the second half

of next year, the newspaper said. China will insist on a policy of strengthening

regulations, curbing bubbles, preventing risks and deleveraging so that the

Chinese economy will maintain a stable growth rate above 6.4%, the commentary

predicted. Therefore, the yuan could appreciate next year and in the longer

term. But uncertainties include possible policy changes by the U.S. government,

the outlook for European monetary policy and the strength and pace of China's

regulation and reform, the commentary warned. (Economic Information Daily)

     Banks' entrusted business has declined rapidly this year as regulators have

strictly controlled interbank liabilities, including negotiable certificates of

deposit, the Chinese Securities Journal reported Tuesday. As of the end of the

third quarter, banks' entrusted transactions stood at CNY10.21 trillion, down

from CNY11.42 trillion at the end of the first quarter, while the value of

entrusted wealth management products fell CNY1.02 trillion compared with the

same period last year, the report said. In the future, big banks are likely to

participate directly in bonds and credit product investments in the future to

their control leverage and credit risks, while small banks will go back to

credit servicing and increased lending, the report predicted. (China Securities

Journal)

     Regulators should control the pace of the deleveraging process for

state-owned companies and set reasonable targets to avoid risks, the Securities

Daily reported Tuesday, citing analysts. Some SOEs are upstream industrial

companies which suffer from excess production capacity and the burden of

ensuring local economic growth and employment. These SOEs cannot survive a harsh

deleveraging campaign considering the large size of their debt, the report

argued. SOE deleveraging also imposes pressure on banks by increasing

non-performing loans, the report warned. Authorities should take the real

economic situation into account and consider appropriate measures. (Securities

Daily)

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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