MNI China Daily Summary: Tuesday, September 5

     TOP NEWS: Expansion of the Chinese services sector accelerated in August as

new orders and output increased, according to the latest survey of purchasing

managers jointly released by Caixin magazine and Markit. The headline index rose

to 52.7 in August, up from 51.5 in July and the strongest reading since 52.8 in

May. Caixin China Composite PMI, which combines the results of the manufacturing

and services surveys, rose to 52.4 from 51.9 in July, the highest rate in six

months.

     LIQUIDITY: The People's Bank of China skipped its open-market operations on

Tuesday. The PBOC said the liquidity level in the banking system was "relatively

high," so the influence of maturing reverse repos can be "absorbed" -- the same

assessment it gave Monday. This resulted in a net drain of CNY70 billion for the

day, as a total of CNY70 billion in reverse repos matured on Tuesday. The

CFETS-ICAP money-market sentiment index ended at 39 on Tuesday, slightly up from

37 at Monday's close. The lower the reading, the better the liquidity conditions

in the interbank market.

     POLICY: Bengbu, a relatively unknown small city in the eastern Chinese

province of Anhui, has attracted much attention because the growth rate of its

housing prices has been one of the highest nationally for the past four months.

On a yearly basis, Bengbu's housing price growth rate rose from  9.20% in March,

or the 26th-fastest growth rate among Chinese cities, to a 17% growth rate in

July, or the fourth-fastest growth rate. "Actually, Bengbu's situation is not

special among Tier-3 and Tier-4 cities," a person who works for a property

developer in Bengbu told MNI. "Rather, it's a miniature reflection" of what

small cities all over the nation are experiencing.

     RATES: Money market rates fell. The seven-day repo average was last at

2.7594%, lower than Monday's average of 2.8991%. The overnight repo average was

2.6113%, lower than Monday's 2.7130%.

     YUAN: The yuan fell against the U.S. dollar even though the People's Bank

of China set a stronger daily fixing. The yuan was last at 6.5312 against the

U.S. unit, compared with the official closing price of 6.5200 on Monday. Before

Tuesday, the yuan had strengthened against the U.S. dollar every trading day

since Aug. 25, except last Thursday. The PBOC set the yuan central parity rate

against the U.S. dollar at 6.5370 on Tuesday, stronger than Monday's 6.5668.

Today's fixing marked the highest since May 18 last year and the biggest daily

rise since June 11.

     BONDS: The yield on benchmark 10-year China government bonds was last at

3.6148%, up from the previous close of 3.6107%, according to Wind, a financial

data provider.

     STOCKS: Stocks rose, led up by shares of financial institutions and real

estate companies. The benchmark Shanghai Composite Index closed up 0.14% at

3,384.32. Hong Kong's Hang Seng Index was 0.09% lower at 27,714.90.

     FROM THE PRESS: Foreign-exchange reserves should be kept steady to

stabilize market expectations, the Financial News, a journal run by the People's

Bank of China, reported Tuesday, citing Zong Liang, chief economist at the Bank

of China. Regulators need to take effective measures to deal with sharp,

short-term volatility of the yuan exchange rate and prevent large changes in

cross-border capital flows, Zong said. Regulations for capital controls should

be further improved to stabilize the yuan exchange rate, while the transition to

a market-oriented exchange rate should be pushed forward, Zong argued.

Regulators should continue to guide market expectations and prepare for yuan

appreciation and Federal Reserve rate increases, Zong said. (Financial News)

     Liquidity in the interbank market has been tight in September as banks'

excess reserve ratios have continued to fall and the People's Bank of China has

further limited its injections, the China Securities Journal reported Tuesday.

With macro-prudential assessments and liquidity coverage ratio tests approaching

at the end of this month, there are major factors that will affect liquidity,

the newspaper said. Some seasonal effects, particularly the tendency of Chinese

people to deposit cash before the National Day holiday the first week of

October, will contribute to liquidity demand, the report said. But the PBOC is

expected to come to the rescue, if necessary, so the risk of a liquidity crunch

is under control. Still, financial institutions need to manage liquidity

properly before problems arise, the newspaper warned. Unexpected tightness in

liquidity usually appears in the months following the end of financial quarters,

such as April and July, and institutions should pay particular attention at

these times, the newspaper said. (China Securities Journal)

     Growth of banks' mortgage loans slowed in the first half of the year

because of strict government controls on the overheated property market, the

21st Century Business Herald reported Tuesday. The proportion of mortgages among

commercial banks' new loans fell to 51.4% in the January-to-June period, well

below the 91.43% in the same period last year. Corporate loans saw a strong

increase as the economy recovered and companies' demand for money accelerated.

Medium- and long-term corporate loans mainly went to government projects like

highway infrastructure, and to leasing and business services. Consumer loans

have become more difficult to obtain, with interest rates generally having risen

by 30% to 40% in the first half, the report noted. (21st Century Business

Herald)

     China's bond market will remain under pressure as issuance rises but demand

remains weak, the China Securities Journal reported Tuesday. After a sharp

decline in the first half of year, the issuance of both treasury and corporate

bonds is expected to jump in the remainder of 2017, the newspaper predicted. But

the market's appetite is still limited, particularly among commercial banks,

which are the main buyers of bonds, at a time of tight liquidity and with a

large number of negotiable certificates of deposit maturing. Treasury bond

issuance is expected to reach as much as CNY6.15 trillion in the second half of

the year, which would be an increase of CNY570 billion compared with the same

period last year, while issuance of corporate bonds will accelerate after a wave

of cancellations in the first half. (China Securities Journal)

     If reform of the real economy is not carried out effectively and problems

including overcapacity, zombie companies and asset bubbles continue to exist,

monetary policy will not be able to help with the effective allocation of

capital, Xia Bin, a counselor at China's State Council, said in an interview

with The Paper published on Tuesday. If financial reform progresses ahead of

reform of the real economy, then financial reform will not see a good outcome,

Xia said. (The Paper)

--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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