MNI China Daily Summary: Wednesday, August 16

PREVIEW: The People’s Bank of China (PBOC) will be expected to announce a reduction in the benchmark 1- and 5-year Loan Prime Rates next week in line with surprise reductions to its minimum lending facility and reverse repo rates on Aug 15 following weak economic data.

LIQUIDITY: The PBOC conducted CNY299 billion via 7-day reverse repos on Wednesday, with the rates unchanged at 1.80%. The operation has led to a net injection of CNY297 billion after offsetting the maturity of CNY2 billion reverse repo today, according to Wind Information. The operation aims to hedge the impact during tax payment period as well as government bond issuance to keep banking system liquidity reasonable and ample, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) decreased to 1.8533% from the close of 1.8815% on Tuesday, Wind Information showed. The overnight repo average rose to 1.8480% from the previous 1.7767%.

YUAN: The currency weakened to 7.2904 against the dollar from 7.2868 on Tuesday. The PBOC set the dollar-yuan central parity rate higher at 7.1986 on Wednesday, compared with 7.1768 set on Tuesday. The fixing was estimated at 7.2769 by BBG survey.

BONDS: The yield on the 10-year China Government Bond was last at 2.6200%, down from Tuesday's close of 2.6275%, according to Wind Information.

STOCKS: The Shanghai Composite Index edged down 0.82% to 3,150.13, while the CSI300 index decreased 0.73% to 3,818.33. The Hang Seng Index lost 1.36% to 18,329.30.

FROM THE PRESS: Forex regulators have sent a clear signal that policy tools will be used in due course should depreciation pressure on the yuan increase, said Wang Qing, chief macro analyst at Golden Credit Rating. The PBOC said on Tuesday it will issue CNY20 billion three-month and CNY15 billion one-year central bank bills in Hong Kong on Aug 22, the fifth time this year. Wang said the issuance scale has increased significantly, which tightens yuan liquidity in the offshore market and increases the cost of shorting yuan. Wang believes the currency is less likely to fall below last year’s low point of 7.37 in the short term, given that real estate risks would be effectively controlled and supportive policies take effect. (Source: 21st Century Business Herald)

The PBOC remains likely to cut the reserve requirement ratio following the policy rate cuts on Monday, as insufficient demand continues to constrain recovery. Banks will benefit from a lower cost of funds and maintain support to the real economy if the RRR is cut, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company. Dong noted policy space exists for the cut given the weighted average RRR is about 7.6%. As local governments are expected to accelerate selling special bonds in Q3, a RRR cut will help keep long-term liquidity ample, said Zhou Maohua, researcher at China Everbright Bank. (Source: Yicai)

Property developers have continued performing poorly in July, hit by weak sales and high debt repayment schedules. Chen Wenjing of the China Index Academy said policymakers would need time for stimulus measures to take effect, and therefore weakness could continue in the short term. Wang Xiaoqiang from the Zhuge Real Estate Data Research Center believed the market would struggle to escape the current downward trend without additional substantial policy support. Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute, said developers had started 30.2% fewer new projects in July m/m, a sign that recent falls in bond prices has further weakened sentiment in the sector. (Source: 21st Century Business Herald)