MNI China Daily Summary: Tuesday, July 23

LIQUIDITY: The People's Bank of China (PBOC) conducted CNY267.3 billion via 7-day reverse repo, with rate kept at 1.70%. The operation has led to a net drain of CNY408.7 billion after offsetting the CNY676 billion maturity today, according to Wind Information.

RATES: China's seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 1.7669% from 1.7184%, Wind Information showed. The overnight repo average increased to 1.7507% from the previous 1.6634%.

YUAN: The currency weakened to 7.2741 from 7.2737 against the dollar from Monday. The PBOC set the dollar-yuan central parity rate lower at 7.1334, compared with 7.1335 set on Monday.

BONDS: The yield on 10-year China Government Bonds was last at 2.1350% down from 2.1600% at Monday's close, according to Wind Information.

STOCKS: The Shanghai Composite Index edged down 1.65% to 2,915.37 while the CSI300 index fell 2.13% to 3,439.88. The Hang Seng Index decreased 0.94% 17,469.36.

FROM THE PRESS: The PBOC could eventually phase out its medium term lending facility and use the DR series of overnight rates as the main policy tool, according to Wen Bin, chief economist at China Minsheng Bank. The real economy would benefit from improved interest-rate marketisation and transmission mechanism under the new system, Wen added. Looking ahead, the PBOC will continue easing given the need to further boost demand, but banks will require deposit interest-rate cuts to support their net interest margin. (Source: Yicai.com)

Accelerated government bond sales will drive infrastructure investment growth in H2 but construction progress could still tame the rebound judging by recent high-frequency data such as cement production, Economic Information Daily reported citing Yuan Haixia, executive director at the China Chengxin International Research Institute. Fiscal policy can be further exerted in H2 with a total of CNY6.04 trillion fiscal funds unused, including CNY2.88 trillion of deficit funds, CNY2.41 trillion of local government special bonds and CNY750 billion of ultra-long-term special treasury bonds, said Wen Bin, chief economist at China Minsheng Bank.

Chinese cities are likely to lower mortgage interest rates for new homes further, but will find reducing rates of existing mortgages challenging, Yicai reported citing analysts. The benchmark Loan Prime Rates were lowered by 10 basis points on Monday, which will help ease new homebuyers’ interest burden, but the widened interest spread with existing mortgages has fueled early repayment and greatly disrupted the net increase in medium and long-term loans. Analysts said banks’ profit assessment and net interest margin are constraining reduction in existing mortgages.