MNI China Daily Summary: Wednesday, August 25

LIQUIDITY: Liquidity across China's interbank market picked up through August, helped by central bank money market operations, according to the latest MNI Liquidity Conditions survey, which also highlights concerns over the slowing economy. The Liquidity Condition Index eased to 32.7 in August from 46.0 in July, the lowest reading in the last 5 months, with almost half of respondents reporting "loose" liquidity conditions after the bigger-than-expected MLF operation in mid-month.

LIQUIDITY: The People's Bank of China (PBOC) conducted CNY50 billion via 7-day reverse repos with the rate unchanged at 2.2% on Wednesday. The operation injected net CNY40 billion into the market as there is CNY10 billion reverse repos maturing today, according to Wind Information. The operation aims to keep month-end liquidity stable, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 2.3265% from the close of 2.2205% on Tuesday, Wind Information showed. The overnight repo average fell to 2.2054% from the previous 2.2682%.

YUAN: The currency strengthened to 6.4742 against the dollar from 6.4778 on Tuesday. The PBOC set the dollar-yuan central parity rate lower at 6.4728 on Wednesday, compared with the 6.4805 set on Tuesday.

BONDS: The yield on the 10-year China Government Bond was last at 2.8350%, down from Tuesday's close of 2.8725%, according to Wind Information.

STOCKS: The Shanghai Composite Index rose 0.74% at 3,540.38, while the CSI300 index increased 0.20% to 4,898.16. Hang Seng Index dropped 0.13% to 25,693.95.

FROM THE PRESS: China has this month intensified signals for a pro-growth focus in the next four months, with increased cross-cycle adjustment measures to ensure a prelude to next year's reasonable growth, the Securities Times said in a front-page report. The PBOC has disclosed that it has made expanding credit the primary objective for the next four months, the official securities newspaper said. The cost of capital is expected to be low given ample monetary supply, the newspaper said. Credit expansion will stabilize after a slowdown in July, and aggregate financing is expected to rebound, it said.

The PBOC may time another RRR cut when the liquidity is pressured by CNY3.05 trillion of MLFs maturing before the yearend, as simply rolling over MLFs will see more funds going to large banks instead of smaller banks supporting SMEs, the 21st Century Business Herald reported citing analyst Luo Yunfeng with China Merchants Securities. The RRR cut in July lifted the currency multiplier of creating money to a record high of 7.41, compared with the previous peak of 7.16 in August 2020, the newspaper said. The possible RRR cut will not affect the size of the central bank's balance sheet, as the contraction by about CNY1 trillion in July is mainly due to the decline in the balance of structural monetary instruments such as MLFs, the newspaper said.

The drastic change in Afghanistan provides a renewed opportunity for cooperation between China and the EU as both sides have economic interests in the region, the Global Times said in an editorial. What has happened in Afghanistan proves that the U.S. is an unreliable partner that will always sacrifice others to protect its own interests, the state-owned newspaper said. European leaders should see that the best course of action is to strengthen cooperation with China, and if the U.S. uses its dollar to sanction Afghanistan, financial cooperation between China and the EU with the rising status of the euro and the yuan may help the country out, Global Times said.