MNI China Daily Summary: Wednesday, December 27

     TOP NEWS: Profit growth of Chinese industrial companies softened in

November on lower input and output prices as well as higher costs, the National

Bureau of Statistics (NBS) said Wednesday. The combined profits of industrial

firms rose 14.9% year-on-year to CNY785.82 billion in November, the weakest

monthly growth this year since the 14.0% rise recorded in April and a drop of

10.2 percentage points from October. From January through November, total

industrial profits rose 21.9% to CNY6.88 trillion, decelerating from the 23.3%

gain in the first 10 months but sharply higher than the 9.6% growth in the same

period of last year. He Ping, an NBS economist, attributed the slowdown of

profit growth in November to the drop in prices. "Profits resulting from price

changes increased CNY62.8 billion year-on-year in November, a reduction of

CNY94.4 billion from October, which means lower prices dragged down total profit

growth for the month 13.8 percentage points," He said.

     POLICY: China has no need to raise its benchmark interest rates as the

economy still faces downturn pressures and inflation has started to fall,

People's Bank of China counselor Sheng Songcheng said Wednesday in an interview

with China Business News. China should maintain stable benchmark rates while

allowing banks to float their rates accordingly in a bid to improve the

efficiency of financial resources allocation and support reform of the banking

sector, Sheng noted. Regulators should prevent financial institutions from

transferring high capital costs to the real economy, which would result in a

rise in funding costs and hurt the government's deleveraging campaign, he said.

Sheng also said that China's monetary policy will not be loosened next year

because the country still needs to consolidate the achievements of the

deleveraging campaign. (China Business News)

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

at 28556%, compared with Tuesday's average of 2.9317%. The overnight repo

average was at 2.6619%, compared with Tuesday's 2.5713%.

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

Wednesday, saying that an increase in fiscal spending toward the year-end can

hedge the impact of maturing reverse repos and that liquidity conditions are

still at a high level. This resulted in a net drain of CNY40 billion for the

day, as a total of CNY40 billion in reverse repos matured on Wednesday. It was

the fourth consecutive trading day that the PBOC has skipped OMOs. The PBOC has

drained a net CNY210 billion from the interbank market so far this week, hurting

market sentiment because liquidity demand is actually increasing at year-end.

     YUAN: The yuan was weaker against the U.S. dollar on Wednesday after the

People's Bank of China set the fixing rate slightly weaker for the day. The yuan

was last at 6.5574, compared with the official closing price of 6.5440 on

Tuesday. The PBOC set the yuan central parity rate at 6.5421, 0.01% weaker than

Tuesday's 6.5416.

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

3.9000%, up from the previous close of 3.8875%.

     STOCKS: Stocks fell, led lower by the securities sector. The benchmark

Shanghai Composite Index closed down 0.92% at 3,275.78. Hong Kong's Hang Seng

Index was 0.03% higher at 29,585.09.

     FROM THE PRESS: China's financial regulations will focus on three risks:

the debt of state-owned enterprises (SOEs), local government debt and the wealth

management sector, the Economic Information Daily said in a front-page

commentary on Wednesday. As an effective method for deleveraging the SOEs,

debt-to-equity swaps will grow rapidly next year, the commentary said. A slower

increase of local government debt will constrain infrastructure investment,

which in turn will drag down demand for raw materials, it said. Under stricter

regulation, the scale of wealth management products will shrink noticeably.

However, regulators have reiterated that they will pace their efforts to

maintain stability, the commentary said. (Economic Information Daily)

     The deterioration in corporate bond issuance in China has sharply increased

this year in a market made sluggish by strict regulation and tight liquidity

conditions, the Shanghai Securities News reported Wednesday. As of the end of

November, 734 corporate bond issues had failed or were canceled, affecting

CNY586.63 billion worth of bonds, compared with CNY577.53 billion for all of

last year. In November alone, CNY85.23 billion worth of bonds were canceled or

postponed, 2.6 times more than in the same period last year. Issuers and buyers

of corporate bonds are both reluctant to do business, with a capital shortage

pushing up bond rates. The situation is expected to continue next year as

liquidity conditions tighten further. (Shanghai Securities News)

     Rates for negotiable certificates of deposit (NCDs) have surged to a record

high this week, the China Securities Journal reported Wednesday. Banks have been

under pressure from year-end liquidity assessments, and a large amount of NCDs,

used in the interbank market, are maturing. On Tuesday, the range of rates for

one-month NCDs issued by AAA-rated joint-stock banks rose to a historic high of

5.2% to 5.5%; for three-month NCDs, the rate range was 5% to 5.3%. A total of

CNY2.2 trillion worth of NCDs mature in December, which means banks need to roll

over the instruments to meet liquidity coverage ratio requirements. An

unexpectedly fast increase in NCD rates began in the middle of September even

though regulators had discouraged the rapid expansion of interbank transactions,

the report said. (China Securities Journal)

     Chinese real estate companies, under pressure from strict regulation, are

intensively selling off assets to get recoup capital and strip away poorly

performing holdings, the Shanghai Securities News reported Wednesday. Property

market controls are deepening, causing transaction volume to drop, and fund

raising for real estate companies has been tightly restricted, so developers are

scrambling to cut debt. In November, 11 real estate companies, including 9 that

are state-owned, sold a total of CNY56 billion in assets. The assets were mainly

out of line with the companies' strategies or were in remote or lower-tier

cities. (Shanghai Securities News)

--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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