MNI China Daily Summary: Tuesday, June 5

     EXCLUSIVE: The People's Bank of China's move Friday to increase the

collateral range for its medium-term lending facility (MLF) loans was a

liquidity operation, used in place of another reserve requirement ratio (RRR)

cut to avoid sending a strong easing signal, a source at the central bank told

MNI Monday. "The RRR cut is indeed a cross-board way to release liquidity, but

it would send too strong signal for easing, particularly when stabilizing

leveraging is still the priority for policymakers," the PBOC source said. "The

(expanded MLF collateral) operation is to inject liquidity, since some banks

have inadequate MLF collateral, which were usually high-rated bonds," the source

added.

     EXCLUSIVE: China is skeptical about signing a long-term trade deal with the

U.S., a trade advisor to the government said Monday in an interview with MNI.

"The Trump administration's tariff threat before the U.S. negotiating team

arrived in China went too far," Mei Xinyu, an advisor to China's Ministry of

Commerce said. "China may not be willing to sign a long-term deal with the U.S."

as President Donald Trump flip-flops on policies that damage the credibility of

the Washington administration. China will not and should not sign any deal to

promise a specific percentage or dollar cut to the U.S. trade deficit as "it is

against economic principles", said Mei, a trade commenter whose articles are

often published by the state media representing the government's opinions.

     POLICY: Moody's Investors Service said that China (A1 stable) is moving

ahead on changes in its economic structure, a credit positive. The pace of

shifts between sectors has risen, with the higher value-added component of the

economy increasing. "If such measures lead to a reallocation of labor and

capital resources that shift credit towards sectors with higher productivity

growth, it will support the Chinese government's credit quality by increasing

its debt-carrying ability," says Marie Diron, a Managing Director for Moody's

Sovereign Risk Group.

     LIQUIDITY: The PBOC injected CNY70 billion and CNY50 billion in 7-day and

28-day reverse repos on Tuesday, with rates unchanged at 2.55% and 2.85%,

respectively, according to a statement on the PBOC website. It resulted in CNY30

billion net drain as a total of CNY150 billion reverse repos matured today, the

first net drain since May 23, according to Wind Information. CFETS-ICAP's

money-market sentiment index closed at 39 on Monday, up from 37 on Friday. 

     DATA: Caixin May Service PMI was 52.9, flat with 52.9 in April. 

     MONEY MARKET RATES: 7-day repo average dropped to 2.7270% from 2.7445%

Monday, after the PBOC drained CNY30 billion via OMOs. The overnight repo

average decreased to 2.5521% from Monday's 2.5727%.

     YUAN: The yuan rose to 6.4065 against the dollar from Monday's closing of

6.4123. Earlier today, the PBOC set the yuan central parity rate at 6.4157,

stronger than Monday's 6.4208. The central bank has set a stronger fixing for

three out of last four trading days.

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

3.6650%, up from the previous close of 3.6500, according to Wind Information.

     STOCKS: Shares rose in Shanghai, led by healthcare companies as inclusion

into the MSCI indexes helped boost investors' confidence, with Hunan Jiudian

Pharmaceutical Co. up by the daily-limit 10%. The benchmark Shanghai Composite

Index closed 0.74% higher at 3,114.21. Hong Kong's Hang Seng Index gained 0.08%

to 31,023.37.

     FROM THE PRESS: Though the PBOC's expansion of collaterals of medium-term

lending facilities helped regain the market's confidence in corporate bonds,

liquidity and bond defaults may not recover immediately, China Securities

Journal reported. Investors are more cautious in investing in the bond market

after recent frequent bond defaults, the newspaper said, citing analysts

including an anonymous fixed-income fund manager. Bond defaults are mainly in

property companies and municipal investment and construction companies, which

are not transmitted to the PPI and CPI, and are thus not affecting the

macro-economy, it said, citing AMP Limited.

     Property sales were robust in May despite tighter policy controls,

Securities Times reported. Sales in 29 major cities monitored by the CRIC

Research Center rose 3% m/m, while the y/y growth was flat, the newspaper said.

Property controls increased, with the property regulator issuing six policies in

10 days, and 15 cities announcing tighter policy controls. Property companies

accelerating property sales to get cash that would relieve financing pressure

and to improve their half-year results helped with the robust sales in May. In

addition, the government's restriction on listing prices of new homes led to new

property units being priced lower than second-hand houses, which has caused home

purchasers to expect higher gains in new house prices in the future, boosting

sales.

     Opinions of the Trump administration's trade officials vary vastly, posing

uncertainties as to the China-U.S. trade negotiations and the global trade

outlook, Caixin reported. The U.S. may be uncertain about what strategies they

should have for China's industrial policy and their sanction on ZTE, the report

said. The U.S. officials are struggling to reach an agreement, divided between

those led by Treasury Secretary Steven Mnuchin as a defender of free trade, and

those led by Trade Representative Robert Lighthizer who is a protectionist,

Caixin said, citing Stephen Moore, economic advisor in Trump's 2016 presidential

campaign.

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]