MNI China Daily Summary: Wednesday, July 27

POLICY: China’s quarter-end politburo meeting expected this week is likely to emphasise moderating inflation and supporting employment as acceptable economic goals for the remainder of 2022, and further housing stimulus and adjustments to the zero-Covid policy which sapped first half output, but officials are unlikely to openly abandon the annual growth target of about 5.5%, analysts said.

LIQUIDITY: China’s interbank markets saw a recovery in liquidity levels in July despite the People’s Bank of China (PBOC) withdrawing funds to ensure no liquidity flood after the half-year passed, the latest MNI Liquidity Conditions Index shows. The Liquidity Condition Index, fell to 34.4 from 57.8 in June, with as many as 37.5% of the participants reporting improved liquidity after the half year adjustments. The higher the index reading, the tighter liquidity appears to survey participants.

LIQUIDITY: The PBOC injected CNY2 billion via 7-day reverse repos with the rate unchanged at 2.10%. The operation has led to a net drain of CNY1 billion after offsetting the maturity of CNY3 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) fell to 1.5498 from the close of 1.5766% on Tuesday, Wind Information showed. The overnight repo average decreased to 1.0031% from the previous 1.0163%.

YUAN: The currency weakened to 6.7569 against the dollar from 6.7557 on Tuesday. The PBOC set the dollar-yuan central parity rate higher at 6.7731, compared with 6.7483 set on Tuesday.

BONDS: The yield on the 10-year China Government Bond was last at 2.7690%, down from Tuesday's close of 2.7700%, according to Wind Information.

STOCKS: The Shanghai Composite Index edged down 0.05% at 3,275.76, while the CSI300 index lost 0.49% to 4,225.04. Hang Seng Index fell 1.13% to 20,670.04.

FROM THE PRESS: China’s infrastructure investment may grow over 10% y/y in Q3, supported by the expected use of over CNY2 trillion local government special bonds, CNY800 billion credit line of policy banks and CNY300 billion financial bonds by policy banks, the Securities Times reported citing analysts. The issuance of a planned CNY3.65 trillion special bonds this year has basically been completed, much earlier than in previous years, which help to offset the decline in land sales revenue for local governments, the newspaper said citing analysts. As of June, local governments have issued CNY3.41 trillion of special bonds, with the issuance in June peaking at CNY1.37 trillion, the newspaper said citing data by the Ministry of Finance.

China should increase fiscal policy intensity to maintain recovery momentum in the second half of the year, including issuing special treasury bonds or front-loading next year’s quota of local government special bonds, Yicai.com reported citing analysts. If without additional fiscal policy to help fill local governments’ funding gap caused by lower land sales revenues and increased spending on pandemic controls, infrastructure investment and economic growth may decelerate in Q4, Yicai said citing Luo Zhiheng, chief economist of Yuekai Securities. Zhu Baoliang, chief economist of the State Information Center believes it requires additional quotas of special bonds from 2023 and CNY1 trillion special treasury bonds to fill the gap in H2, said Yicai.

China’s real estate market may see a soft landing in H2 as it accelerates recovery, according to a commentary on 21st Century Business Herald written by Pang Ming, chief economist at JLL Greater China. Major indicators, such as land acquisition, new project starts and construction are expected to bottom out around end-Q3 with further policy support, Pang said. Housing hotspots, even first- and second-tier cities are expected to further relax purchase and loan restrictions, as well as lower transaction taxes and fees, while developers will receive necessary credit support, said Pang.