MNI China Daily Summary: Wednesday, June 15

POLICY: China’s central bank needs to enhance regional FX policy coordination because of the potential spillover effects of the sharp depreciation of the Japanese yen which may intensify volatility of Asian currencies and hurt exports, market analysts said. The rapid drop of the yen, which reached a quarter century low above JPY135.50 to the dollar on Wednesday, was seen as pushed by the continued easy policy of the Bank of Japan.

POLICY: China’s industrial output made a surprise rebound that can carry momentum if Covid-19 curbs in Shanghai and other cities continue an easing trend, but weak retail sales showed the need for more domestic policy steps to stimulate overall demand and revive economic growth, according to analysts.

DATA: Industrial production rose 0.7% y/y in May, reversing a 2.9% decline in April and outshining the forecast 1.0% decline, data by the National Bureau of Statistics showed. Retail sales fell 6.7% y/y in May, narrowing from April's 11.1% decline, slightly weaker than the forecast 6.5% decline. Fixed-asset investment slowed to 6.2% y/y in the first five months, from the 6.8% gain in the Jan-Apr period, better than the 6.1% forecast.

LIQUIDITY: The People's Bank of China (PBOC) injected CNY200 billion via one-year medium-term lending facilities and CNY10 billion via 7-day reverse repos with the rate unchanged at 2.85% and 2.10% respectively. This keeps the liquidity unchanged after offsetting the maturity of CNY 200 billion MLF and CNY10 billion repos today, according to Wind Information. The operation aims to keep liquidity reasonable and ample, the PBOC said on its website.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 1.6162 from the close of 1.5942% on Tuesday, Wind Information showed. The overnight repo average rose to 1.4116% from the previous 1.4059%.

YUAN: The currency strengthened to 6.7195 against the dollar from 6.7358 on Tuesday. The PBOC set the dollar-yuan central parity rate higher at 6.7518, compared with 6.7482 set on Tuesday.

BONDS: The yield on the 10-year China Government Bond was last at 2.8190%, up from Tuesday's close of 2.8100%, according to Wind Information.

STOCKS: The Shanghai Composite Index edged up 0.50% at 3,305.41, while the CSI300 index rose 1.32% to 4,278.22. Hang Seng Index rallied 1.14% to 21,308.21.

FROM THE PRESS: The PBOC is expected to keep its Loan Prime Rate unchanged this month considering the actual corporate loan rates have already been falling and lenders are still suffering high borrowing costs, the Securities Daily reported citing market analysts. After the 15bps cut in the five-year and above tenor of LPR last month, it is less necessary to touch the policy rate in the short term, said Liang Si, researcher with Bank of China. But there is still room for cuts later this year, particularly for the five-year and above tenor to boost the property market, said Xie Yunliang, an analyst with Cinda Securities, noting the PBOC could liberalise deposit rate mechanism to lower lenders’ funding costs in a bid to leave more room for LPR cuts.

China fiscal authorities may issue special treasury bonds or front load part of the quota of 2023 local government special bonds in the second half of this year if domestic and overseas economic headwinds maintain strong, China Securities Journal reported Wednesday. Considering both companies and households are reluctant to expand debt loads, the government has to add leverage to boost the economy, said Zhang Jun, economist with Morgan Stanley. He suggested the special treasury bonds could focus on small and medium-sized private companies and households hit by the pandemic to shore up employment.

The reversal in U.S.-China interest rate differentials in long-term government bond yields is likely to be sustained due to policy divergences, but the impacts on capital outflows from China are reducing, Caixin reported Wednesday. Since the end of May, the outflow from domestic equity and bond markets has improved as the pandemic situation gets better in major cities, the report said citing a note from China Merchants Securities. The 10-year CGB yield will remain at a low level since economic indicators have shown a slow recovery and inflation is seen largely in check for now, market analysts said.