MNI China Daily Summary: Wednesday, August 23

     TOP NEWS: The U.S. Treasury Department announced Tuesday that it had

imposed sanctions on six Chinese firms and individuals for conducting business

with North Korea, in line with U.N. resolutions targeting North Korea's nuclear

missile and weapons program. The Treasury Department's Office of Foreign Assets

Control (OFAC) said in a statement that it was sanctioning Dandong Rich Earth

Trading Company for buying vanadium ore from a company with links to North

Korea's General Bureau of Atomic Energy, which is responsible for North Korea's

nuclear program, and Mingzheng International Trading for helping finance

transactions by North Korean firms. Three Chinese coal companies were also

sanctioned for importing coal from North Korea between 2013 and 2016.

     TOP NEWS: Market rates surged on Wednesday as the People's Bank of China

continued to drain liquidity from the interbank market via its open market

operations, traders said. The benchmark volume-weighted average rate of

seven-day repo jumped to 2.9747% at 10:20 am Beijing time, from the previous

close at 2.8939%, while the over-night repo also rose to 2.8505% from the

previous close at 2.7923%. Traders told MNI the consecutive net drains each day

this week by the PBOC have tightened liquidity and made banks quite cautious

about lending out money to other institutions, worrying the situation could get

worse. The PBOC has drained a net CNY100 billion via OMOs so far this week. The

National Interbank Funding Center showed the average rate of overnight repo

surged as high as 2.9974% at 9:30 am this morning, while the seven-day repo rose

to 3.44%, but traders said there were some pricing mistakes in the system that

exaggerated the rise.

     TOP NEWS: The People's Bank of China injected CNY100 billion in seven-day

reverse repos and CNY80 billion in 14-day reverse repos via open-market

operations. This resulted in a net drain of CNY40 billion for the day, as a

total of CNY220 billion in reverse repos mature. This was the third consecutive

day this week that the PBOC has drained liquidity from the interbank market via

OMOs. The CFETS-ICAP money-market sentiment index ended at 50 on Tuesday, down

from 58 at Monday's close. The lower the reading the better the liquidity

conditions in the interbank market. 

     SPECIAL BONDS: Late Tuesday, the Ministry of Finance and the PBOC announced

to roll over special government bonds held by the People's Bank of China

totaling CNY600 billion. The MOF will issue a total of CNY400 and CNY200 billion

of seven-year and 10-year government treasuries with yields of 3.6% and 3.62%,

respectively, to target banks on Aug. 29, rolling over the same amount in

special government treasuries that will mature on the same day. The MOF also

said the PBOC will conduct open-market operations for those target banks.

     RATES: The China Foreign Exchange Trade System (CFETS) updated the opening

rates for deposit repos on Wednesday from 3.11% and 3.44% for one-day and

seven-day drepos to 2.55% and 2.65%, respectively, according to Wind

Information.

     RATES: The Ministry of Finance reopened and sold CNY36 billion in

three-year treasury bonds at a yield of 3.4865% in an auction on Wednesday. The

yield was lower than the rate of 3.5006% that bonds with the same maturity

fetched in the secondary market on Tuesday. The bonds were first auctioned on

July 27 with a coupon of 3.46%.

     RATES: Money market rates were mixed. The seven-day repo average was last

at 2.8933%, slightly lower than Tuesday's average of 2.8939%. The overnight repo

average was at 2.8592%, higher than Tuesday's 2.7923%.

     YUAN: The yuan was weaker against the U.S. dollar after the People's Bank

of China set the fixing rate weaker for the day. The yuan was last at 6.6655

against the U.S. unit, compared with the official closing price of 6.6605 on

Tuesday. The PBOC set the yuan central parity rate at 6.6633, 0.05% weaker than

Tuesday's 6.6597.

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

3.5884%, compared with the previous close of 3.5942%.

     STOCKS: Stocks fell, with the bank sector leading losses. The benchmark

Shanghai Composite Index closed down 0.08% at 3,287.70. The Hong Kong Exchange

closed all trading Wednesday after Typhoon Hato reached Signal No. 10. 

     FROM THE PRESS: Deleveraging, particularly reducing the high leverage ratio

of companies, will be a long-term task, the Financial News, a journal run by the

People's Bank of China, said in the front page commentary on Wednesday. Heavy

financial burdens and high debt risks still exist in some companies, although

the overall corporate leverage ratio has declined, the commentary noted, adding

the acceleration of deleveraging in state-owned enterprises will be most

important task to advance corporate deleveraging in the period ahead. But

deleveraging is a gradual process and needs to avoid a squeeze on credit and

investment that would hurt economic growth, the commentary argued. The campaign

should control capital injections and optimize funding structures, while

cracking down on the "invisible debt" of local governments and deepening reform

of SOEs, the commentary argued. (Financial News)

     Interbank transactions should serve banks' liquidity management and not be

a tool for speculative arbitrage, the Economic Information Daily said in the

front page commentary on Wednesday. Financial institutions should be careful to

avoid excessive reliance on wholesale funding, the commentary noted. Bonds and

non-standard assets supported by wholesale funding rely heavily on adequate

financial market liquidity, so any disruption of access to wholesale funding for

some institutions could easily trigger a risk for the market as a whole, the

commentary warned. Regulators should establish relevant rules in a timely manner

to curb the irrational interbank arbitrage, the commentary argued. (Economic

Information Daily)

     Full-year economic growth will be higher than the government's target even

though the economy is likely to see a slight slowdown in the second half of the

year, the 21st Century Business Herald reported Wednesday, citing Wang Yiming,

deputy director of the Development Research Center of the State Council. Several

factors will cause growth to slow in the period ahead, including a deceleration

in investment, dragged down by the property and infrastructure sectors, Wang

said. Export growth will soften from the previous strong performance and the

manufacturing restocking process will gradually slow. In addition, a falling

Producer Price Index will weaken the profit rebound of upstream companies, Wang

said. (21st Century Business Herald)

     The volume of green bond issuance fell sharply in the first half of the

year due to rising money market rates, the Securities Times reported Wednesday.

As of Aug. 22, banks had issued a total of CNY58.4 billion in green bonds so far

this year, down from CNY92 billion in the same period last year, the report

said. Most big banks have stopped issuance as green bonds' rate advantage has

dropped, while smaller banks still see green bonds as a good way to raise funds

given tighter regulations on their funding raising via negotiable certificates

of deposit, the report noted. (Securities Times)

     Banks' low excess reserve ratios could increase volatility in interbank

market liquidity and so reduce banks' willingness to lend, the China Securities

Journal warned in a report Wednesday. Banks' aggregate excess reserve ratio fell

to only 1% in the middle of August, which was a main reason for recent tight

liquidity, the report noted. One principle of the deleveraging campaign is that

the PBOC will have a greater tolerance for a low excess reserve ratio. This

means liquidity volatility will continue over the long term unless the central

bank's foreign exchange purchase position increases sharply or the PBOC injects

a large amount of liquidity, such as via a reserve requirement ratio cut, the

report argued. Given the prospect of continued liquidity volatility, banks need

to improve their management of liabilities and liquidity as soon as possible.

(China Securities Journal)

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

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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