MNI China Daily Summary: Tuesday, June 26

     TOP NEWS: The People's Bank of China (PBOC) will use structural tools to

ease liquidity in a bid to offset the effects of deleveraging, deal with any

economic downturn and pre-empt any fall out from the looming Sino-U.S. trade

war, MNI was told by people close to the central bank. The PBOC has been

carefully balancing its targets of stabilizing economic growth and solving the

huge pile of debt in the economy, with structural tools, including targeted RRR

cuts and the expansion of MLF collateral, to the fore. 

     TOP NEWS: Barriers to reaching a reciprocal trading agreement with China

remain a big obstacle for the European Union (EU), Jyrki Katainen, vice

president of European Commission, told MNI Monday following high-level economic

talks in Beijing. China's subsidies for state-owned enterprises and trading

practices such as forced technology transfers are the biggest problems in

trading with China, Katainen said.

     YUAN: USDCNH has risen for 9 consecutive trading days and is now up on the

year. The pair is rapidly heading to resistance at 6.60 and with the RSI at 82

we would not be surprised to see a pullback. However, with the positive comments

from US trade advisor Peter Navarro that the US is not planning on imposing

investment restrictions on China failing to provide any relief to the yuan, it

seems as though diverging monetary policy outlooks between the US and China are

the main driver of yuan weakness.

     LIQUIDITY: The PBOC injected CNY80 billion via its 7-day reverse repos on

Tuesday, resulting in a net drain of CNY90 billion as a total of CNY170 billion

reverse repos matured today, according to a statement on the PBOC website. The

divergence in monetary policy between China and the US continues and with the

threat of a trade war till looming the next shift in the PBOC's policy

trajectory is more likely to be dovish than hawkish as the bank's deleveraging

goals take a back seat to stability and growth. CFETS-ICAP's money-market

sentiment index closed at 37 on Monday, up from 33 on Friday.

     MONEY MARKET RATES: Benchmark 7-day deposit repo average fell to 2.8020% on

Tuesday from 2.8065% on Monday; Overnight average decreased to 2.4811% from

2.5143% on Thursday: Wind Information.

     YUAN: The yuan weakened to 6.5315 against the U.S. dollar on Tuesday from

Monday's 6.5240 closing, following today's weaker fixing. The PBOC set the yuan

central parity rate at 6.5180, weaker than Monday's 6.4804. The central bank has

set the fixing weaker for five trading days out of four this week.

     BONDS: The yield on benchmark 10-year China Government Bond was last at

3.2600%, remained unchanged from the previous close, according to Wind

Information.

     STOCKS: Shares in Shanghai dropped to the lowest level in two years,

entering bear market territory, referring to a decline of 20 percent or more

from a one-year high. Shanghai Composite Index closed 0.52% higher at 2844.51.

Hong Kong's Hang Seng Index rose 0.01% to 28965.06.

     FROM THE PRESS: The resilience of China's economy will keep the yuan

stable, reported by Shanghai Securities, citing experts. The yuan closed at

6.5433 on Monday, recording the biggest drop since September last year, the

newspaper said. The strong US dollar and the huge policy divergence between

China and the U.S. have resulted in the fall of the yuan, said Zhang Ming, chief

economist of Ping An Securities. That said, the yuan will not drop

significantly, and two-way fluctuations between 6.1 and 6.7 should be expected

over the year, said Cheng Shi, chief economist of ICBCI, according to the

newspaper. The depreciation of the yuan mainly resulted from changes in

short-term market sentiment; but the overall trend is still determined by

fundamentals of the Chinese economy, said Guan Tao, former official of State

Administration of Foreign Exchange, according to the newspaper.

     China Development Bank (CDB) has revoked shantytown renovation loan

approval, reported the 21st Century Business Herald. CDB may pause the programme

to regulate local government liabilities, which will affect compensation for

relocated people, said an official in the fiscal system of Zhejiang Province,

according to the newspaper. CDB started to give subsidies in 2014 so that

shantytown dwellers would be able to buy existing homes rather than being

relocated to low-cost public housing. This was used to improve residents'

livelihood and cut excess urban real estate inventory, the newspaper said.

     Reserve requirement ratio cuts do not signal looser monetary policy,

Economic Daily stressed in a commentary after the third RRR cut this year. The

PBOC will maintain a steady and prudent monetary policy, said an unidentified

officer of the PBOC, according to the journal. Liquidity is at a reasonable and

stable level while the yuan exchange rate may fluctuate in both directions; and

under such macroscopic background, a loose monetary policy is not necessary,

said the journal. Cutting RRR is an effective tool to promote the debt-to-equity

swap programme and to lower the financing costs of small firms, said the

journal.

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

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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