MNI China Daily Summary: Wednesday, January 31

     TOP NEWS: The People's Bank of China has made it more difficult for

non-bank financial institutions (NBFIs) to borrow overnight money, as it has

ordered some banks to stop lending in order to force NBFIs to deleverage,

China-based traders have told MNI. The PBOC's move is aimed at forcing NBFIs to

deleverage by increasing difficulties and costs for NBFIs to get funding to

leverage up. According to one trader, the overnight borrowing rate spread

between banks and NBFIs was as high as 100 basis points on Monday.

     DATA: The headline manufacturing PMI index softened to 51.3 in January, the

weakest in eight months, compared with 51.6 in December and 51.3 in January

2017. It was lower than the median of an MNI survey, which projected 51.5. The

January reading was the 18th consecutive month that manufacturing sentiment

remained above the 50-mark, the point which divides expansion and contraction. 

     RATES: The seven-day repo average was last at 2.8458%, down from Tuesday's

average of 2.8993%. The overnight repo average was 2.5857%, higher than

Tuesday's 2.5154%.

     LIQUIDITY: PBOC skipped its Open Market Operations (OMO) on Wednesday,

stating on its website that the orderly use of Contingent Reserve Allowances

(CRA) and fiscal expenditure can absorb the effects of maturing reverse repos

and cash withdrawals. The statement made today used the same wording as

statements from the last two trading days. Net drain of CNY210 billion today

after same amount of reverse repos mature. CFETS-ICAP money-market sentiment

index closed at 39 yesterday, down from 41 at Monday's close. The benchmark

7-day deposit repo average fell to 2.6648% today from 2.8993% on Tuesday.

     YUAN: The yuan gained against the U.S. dollar on Wednesday even after the

PBOC again set a weaker fixing. The yuan last traded 6.2921 against the U.S.

unit, compared with the closing price of 6.3415 on Tuesday. The PBOC set the

yuan central parity rate vs the U.S. dollar at 6.3339 on Wednesday, weaker than

Tuesday's 6.3312. The central bank set the rate weaker for a second day

following seven days of stronger fixings. 

***COMMENT: The yuan fluctuated after the dollar index recovered slightly from

its recent plunge. Market sentiment on the outlook of the yuan remains positive.

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

3.9125%, down from the previous close of 3.9300%.

     STOCKS: Stocks dipped in Shanghai, led by animal husbandry companies as

colder-than-normal weather throughout China killed herds and halted

transportation. Shares in Henan Huaying Agricultural Development, the biggest

duck raiser, plunged by the 10% daily limit. The benchmark Shanghai Composite

Index lost 0.21% to 3,480.83. Hong Kong's Hang Seng Index fell 0.65% to

32,818.54.

     FROM CHINESE PRESS: Some Chinese banks suspended offering credit to

property developers or loaning to real estate projects, while some said they've

slowed the approval process, China Securities Journal reported. Actions followed

tougher lending procedures on property industry ordered on banks and financial

trusts: Journal. Rental properties still receive normal funding, the Journal

cited a market source. 

***COMMENT: MNI sources said developers, forced by the tougher environment

domestically, are increasingly turning to selling offshore bonds to raise funds,

though that resort too needs regulatory approval.

     The key task of China's drive to control financial risks is applying

tougher regulations over malfeasance in the banking industry, said a commentary

published on the front page of Economic Information Daily. The author, Dong

Ximiao, is a Renmin University researcher often cited by prominent state media.

Other points mention were: Shadow banking and cross-market financial products

should be targeted; Regulators should create further specific rules for regulate

banks; Regulations must be tough enough to achieve results. 

***COMMENT: State press is helping regulators drum up the government's crackdown

on financial institutions. Investors perceive this as positive for bank shares

evidenced by recent rallies. It is negative for the property market, non-bank

institutions, and may strain liquidity.

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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