MNI China Daily Summary: Tuesday, February 27

POLICY: China should optimise its debt structure and 'moderately' boost the proportion of central government debt, as local governments, facing declining land sale revenues but increased spending on social security and employment, are under greater repayment pressure, according to a report released by the Chinese Academy of Fiscal Sciences.

POLICY: Beijing remains unhappy with the European Union probe into its electric vehicle subsidies because it lacks a factual basis, Minister of Commerce Wang Wentao has told EU Trade Commissioner Dombrovskis.

POLICY: China's Strategic Emerging Industries Purchasing Managers' Index (EPMI) dropped to 45.5 in February, from January’s 50.8, and the first time below the confidence mark of 50 since September last year, according to data from the Chinese Academy of Science and Technology Development Strategy.

LIQUIDITY: The People's Bank of China (PBOC) conducted CNY384 billion via 7-day reverse repo on Tuesday, with the rates unchanged at 1.80%. The reverse repo operation has led to a net injection of CNY343 billion reverse repos after offsetting CNY41 billion maturity today, according to Wind Information.

RATES: China's seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 1.9287% from 1.9128%, Wind Information showed. The overnight repo average increased to 1.8105% from the previous 1.7793%.

YUAN: The currency strengthened to 7.1978 against 7.1981 at Monday's close. The PBOC set the dollar-yuan central parity rate lower at 7.1057, compared with 7.1080 set on Monday. The fixing was estimated at 7.1966 by Bloomberg survey today.

BONDS: The yield on 10-year China Government Bonds was last at 2.4200% unchanged from Monday's close, according to Wind Information.

STOCKS: The Shanghai Composite Index edged up 1.29% to 3,015.48 while the CSI300 index rose 1.20% to 3,494.79. The Hang Seng Index was up 0.94% to 16,790.80.

FROM THE PRESS: Small and medium-sized commercial banks may need to lower their deposit interest rates further due to capital adequacy pressure, said Jia Dongxu, senior macro analyst at Shenwan Hongyuan. The capital adequacy ratios of city and rural commercial banks were 12.63% and 12.22% in Q4 2023, which were lower than the industry average of 15.06%. Meanwhile, banks’ profitability is under greater pressure with the average net interest margin falling 4 basis points to 1.69% in Q4, a new low since statistics were collected in 2010. Major state-owned banks lowered their deposit interest rates three times last year, but the rate reduction of smaller banks has largely lagged. (Source: Securities Daily)

Local government financing vehicles will continue to face tighter supervision as many provinces aim to reduce existing debt and the number of such instruments in 2024, 21st Century Business Herald reported. For instance, Guizhou province for the first time allowed a well-qualified financing platform to issue bonds to repay the principal of maturing transactions of a weaker financing vehicle. The market expects such cases to increase in future. Since 2017, Chongqing, Hunan, Shaanxi, Shandong and Gansu provinces have revealed plans to transform these financing vehicles.

China’s consumer infrastructure REIT market could reach CNY700 billion in future if the market follows international trends, according to calculations by Guo Xiangyu, research director of Tsinghua University School of Finance. Beijing will soon launch the first batch of consumer infrastructure REITs, with three of the six currently approved REITs ready for listing, totalling CNY8.9 billion. Authorities will issue consumer infrastructure REITs to increase household spending while improving consumption models and the quality of commercial projects, said Song Hongwei, research director at Tongce Research Institute. (Source: Securities Daily)