MNI China Daily Summary: Tuesday, December 26

     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

holiday.

     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: marissa.wang@marketnews.com

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

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