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(Z1) Off Lows, But Remains Weak


Still Vulnerable


Bullish Price Sequence

     TOP NEWS: The Chinese yuan has made the most of the festive season, surging
to a recent high as the U.S. dollar has lost steam and trading volume has
weakened during the Christmas and New Year holiday. On Christmas day, an
ordinary trading day in China, the onshore yuan surged to its strongest level in
three months, breaking through the 6.54 threshold from about 6.57 and ending the
day at 6.5404, the strongest close since Sept. 13. The appreciation of 283 pips
on the day was the biggest daily rise since Oct. 10. The offshore yuan also
showed some holiday vigor on Christmas, rising 127 pips to 6.5519, the highest
since Sept. 15. In the five trading days since Dec. 19, the onshore yuan has
appreciated 766 pips, approximating the 838-pip rise during China's Sept.
29-Oct. 10 national holiday.
     POLICY: The Ministry of Finance said in a report on its working plan that
the central government will never bail out local governments by paying their
debts, and would prevent local governments from launching new projects they are
unlikely to afford and are not profitable. In making its views on the matter
public, the MOF said it wanted to break the "myth" that the government could
always be relied on for bailouts, the report said. The MOF said in the report,
published over the weekend, that it would prioritize the prevention of local
government debt growth. As part of the plan, the MOF will urge financial
institutions not to provide funding to local projects that do not generate
"constant and stable" cash flows.
     RATES: Money market rates rose as short-term capital demand has increased
at year-end. The seven-day repo average was last at 2.9228%, compared with
Monday's average of 2.8192%. The overnight repo average was at 2.5678%, compared
with Monday's 2.5262%.
     LIQUIDITY: The People's Bank of China skipped open-market operations,
saying that an increase in fiscal spending at the end of the year would hedge
the impact of maturing reverse repos and that liquidity was still high. This
resulted in a net drain of CNY50 billion for the day, as a total of CNY50
billion in reverse repos matured on Tuesday. It was the third consecutive
trading day the PBOC has skipped OMOs.
     YUAN: The yuan was weaker against the U.S. dollar on Tuesday even though
the People's Bank of China set the fixing rate stronger for the day. The yuan
was last at 6.5505 against the U.S. unit, compared with the official closing
price of 6.5404 on Monday. The People's Bank of China set the yuan central
parity rate against the U.S. dollar at 6.5416 on Tuesday, stronger than Monday's
6.5683. Today's fixing was the highest since Sept. 13, when it was 6.5382.
     BONDS: The yield on benchmark 10-year China government bonds was last at
3.8825%, compared with the previous close of 3.8800%.
     STOCKS: Stocks rose, with the cement, equipment and environmental
protection sectors leading gains. The benchmark Shanghai Composite Index closed
up 0.78% at 3,306.12. Hong Kong's stock market was closed for the Boxing Day
     FROM THE PRESS: China's deleveraging campaign should focus next year on
nonfinancial state-owned companies, particularly "zombie" companies, to improve
productivity, Huang Yiping, an academic and a member of the Monetary Policy
Committee of the People's Bank of China, said in an article published Monday on
the website of the Finance40 Forum, an official think tank. The leverage ratio
of state-owned enterprises has barely changed even as the overall campaign has
had unexpected success. "Zombie" companies -- money-losing companies that rely
on government support -- exist because government guarantees are implicit, Huang
said. China can continue to improve efficiency in the financial sector through
curbing shadow banking, reducing growth in the M2 money supply and increasing
direct funding, Huang wrote.
     China will take measures to increase consumption and stabilize foreign
trade in 2018, Commerce Minister Zhong Shan has said, the Economic Information
Daily reported Tuesday. The measures include cultivating cross-border
e-commerce, building high-level trade platforms, facilitating trade and
continuing a proactive export policy, Zhong said Monday at the National Commerce
Work Conference. By 2020, China will consolidate its place as a major trading
nation; by 2035, it will begin to become a trading power; and by 2050, it will
establish itself as wide-reaching trading power, Zhong said. During the first 11
months this year, the total volume of goods traded rose 15.6% year-on-year, the
fastest pace in six years, and exports exceeded imports in the service sector
for the first time, Zhong noted. (Economic Information Daily)
     The Chinese bond market is expected to continue to be sluggish in 2018 as
liquidity conditions in the interbank market remain tight, the China Securities
Journal reported Tuesday, citing officials and economists. As of the end of the
third quarter of 2017, the average excess reserve ratio of commercial banks had
dropped to 1.3%, the lowest in six years. Banks' deposits and wealth-management
capital also have steadily declined this year. In 2018, bond yields are expected
to rise because of the effects of domestic and international factors, but the
bond market most likely will not suffer a sharp correction, like it has in the
past two years. (China Securities Journal)
     Issuance of local government bonds is expected to grow in 2018 with a
probable surge in a newer special bond, the 21st Century Business Herald
reported Tuesday. Issuance of the special bond is predicted to reach CNY2.3
trillion next year, CNY670 billion more than in 2017, the newspaper said, citing
bond analysts. Special bond issues doubled to CNY800 billion in 2017 from 2016,
the report said. Issuance of local government bonds has shrunk this year as
rates rose because of tight financial regulation, totaling CNY4.36 trillion as
of Dec. 25, compared with CNY6.05 trillion in 2016, the report said. (21st
Century Business Herald)
--MNI Beijing Bureau; +86 (10) 8532 5998; email:
--MNI Beijing Bureau; +86 (10) 8532-5998; email:
[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]