MNI China Daily Summary: Wednesday, May 25

POLICY: The Chinese yuan is returning to a two-way range against the U.S dollar as market sentiment bets on improved fundamentals after the central bank further moved to bolster the economy, and as an end to two months of strict lockdowns in Shanghai is in sight, market analysts said. Analysts predicted USD/CNY may trade in a volatile range of CNY6.6 to CNY6.85 in the short term. Even though there is still depreciation pressure, the possibility for the yuan to break the level of CNY7.0 against the dollar in the rest of this year is low.

LIQUIDITY: With further lockdowns and Covid-related restrictions across the economy, demand for credit has slowed, leaving an abundance of liquidity in the system, which, along with central bank operations, has pushed short-term money market rates lower, the latest MNI Liquidity Conditions Index shows. The Liquidity Condition Index slipped to 12.5 in May, down from 30.0 in April, touching the second lowest reading since the breakout of the Covid in early 2020. As many as three-quarters of traders reporting conditions improved on April.

LIQUIDITY: The People's Bank of China (PBOC) injected CNY10 billion via 7-day reverse repos with the rate unchanged at 2.1% on Wednesday. This keeps the liquidity unchanged after offsetting the maturity of CNY10 billion repos today, according to Wind Information. The operation aims to keep liquidity reasonable and ample, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 1.6970 from the close of 1.5435% on Tuesday, Wind Information showed. The overnight repo average rose to 1.3451% from the previous 1.3280%.

YUAN: The currency weakened to 6.6737 against the dollar from 6.6671 on Tuesday. The PBOC set the dollar-yuan central parity rate lower at 6.6550, compared with 6.6566 set on Tuesday.

BONDS: The yield on the 10-year China Government Bond was last at 2.7900%, down from Tuesday's close of 2.7940%, according to Wind Information.

STOCKS: The Shanghai Composite Index gained 1.19% at 3,107.46, while the CSI300 index rose 0.61% to 3,983.18. Hang Seng Index edged up 0.29% to 20,171.27.

FROM THE PRESS: More foreign investment institutions set yuan equilibrium levels at CNY6.5 to CNY6.6 against the U.S. dollar, over 2,000 basis points higher than that at end-April, the 21st Century Business Herald reported citing traders. The falling dollar index has driven the yuan rally in the past week, but more importantly, overseas investors are correcting previous mispricing following China’s proactive moves to stabilise growth and resume production from Covid-19 lockdowns. Overseas institutions prefer the relatively stable economic fundamentals of China, as the Fed’s continuous rate hikes increase the risk of U.S. recession, the newspaper said citing an unnamed hedge fund manager.

China’s monetary policy has ample space and diversified tools to push the economy back to a normal track with the priority to drive credit expansion to boost SME loans, the China Securities Journal reported citing analysts. The PBOC has doubled the amount of supporting tools for SME loans, and it is expected to provide as much as 2% of the incremental balance of SME loans to local banks, the newspaper said citing analysts. The central bank will maintain ample liquidity and not rule out further RRR cuts and expansion of re-lending and re-discount quotas, the newspaper said citing Gao Ruidong, chief macroeconomist of Everbright Securities.

The A share market is still grinding at the bottom with the Shanghai Composite Index likely to fluctuate between 2,900 to 3,200 points, though better than the risk aversion and panic environment in the first four months, the National Business Daily reported citing Fang Yi, chief strategy officer of Guotai Junan. A total of 2,934 A shares fell by more than 4% on Tuesday, accounting for 62.8% of all A shares still trading, and the Shanghai Composite Index saw the biggest drop since May to 3,070.93, the newspaper said. The decline was led by emerging tech stocks, and any rebounds may depend on how global inflation and China-U.S. relations go, the newspaper said citing analysts.