MNI China Daily Summary: Wednesday, June 20

     TOP NEWS: China's government is telling its people to buckle up for a

potentially rough trade showdown with the U.S., suggesting it will resort to all

means to "inflict maximum damages" to the Donald Trump administration. In

response to the White House's latest threat to levy 10% tariffs on another

USD200 billion of Chinese goods, the Ministry of Commerce, in a tersely crafted

statement, said China will take "comprehensive measures" combining both

quantitative and qualitative measures.

     ANALYSIS: Deutsche Bank's analysis indicates a "further escalation of the

US-China trade dispute to include $200bn of imports could reduce real US GDP

growth by roughly -0.2 to -0.3 percentage points. In addition, the effective

$32.5 billion "tax" on imported goods could have the effect of boosting core PCE

inflation by roughly 0.15 percentage points." - Their base case remains that the

"trade conflict with China will be settled before it progresses significantly

beyond the initial imposition of tariffs on $50bn of imports in both directions.

However, recent events have clearly increased the risks that the conflict will

begin to have measurable negative economic effects. If things do go further, we

are guessing that the stock market correction could get into the -5% to -10%

range. If a settlement is then negotiated quickly, the stock market could

recover and the risks to GDP mitigated. However, if a trade war gathers further

momentum, it could well induce the next recession."

     LIQUIDITY: The PBOC injected CNY70 billion 7-day and CNY30 billion 14-day

reverse repos, resulting in a net injection of CNY40 billion as a total of CNY60

billion reverse repos matured today. CFETS-ICAP's money-market sentiment index

closed at 47 on Tuesday, up from 37 on Friday.

     MONEY MARKET RATES: 7-day repo average last rose to 2.8131% from the

2.7661% recorded Tuesday. Overnight repo average increased to 2.6102% from

2.5715% Tuesday.

     YUAN: The yuan strengthened to 6.4680 against the U.S. dollar on Wednesday

from Tuesday's 6.4743 closing, despite today's weaker fixing. The PBOC set the

yuan central parity rate at 6.4586, weaker than Tuesday's 6.4235.

     STOCKS: Shares recovered in Shanghai after dropping 3.78% yesterday to the

lowest in almost two years. The benchmark Shanghai Composite Index closed 0.27%

higher at 2,915.73. Hong Kong's Hang Seng Index rose 0.79% to 29,700.70.

     FROM THE PRESS: The PBOC will integrate different monetary policy tools to

counter related shocks, Governor Yi Gang said in interview with Shanghai

Securities News addressing the major stock market selloff yesterday due to

concerns of a looming trade war with the U.S. The central bank will keep

liquidity appropriate and stable and carefully balance the pace of the

structural deleveraging campaign, Yi told the newspaper. China has solid

economic fundamental and the quality of growth is rising, which will help

capital market to develop healthily and counter risks from the trade conflicts,

Yi was cited by the newspaper as saying. The Shanghai Composite Index fell 3.78%

yesterday. The fall in the stock market is mainly due to investor sentiment and

investors are likely to remain calm and rational, Yi was cited by the report.

Domestic consumption has been increasingly important for China's economic

growth, while trade dependency has fallen, suggesting a stronger capacity to

cope with external uncertainties Yi told the newspaper. 

     Increased bad loan ratios reflects improved business operations of banks,

21st Century Business Herald reported, citing various bankers and analysts. Bad

loan ratio rose to 1.9% as of the end of May from 1.75% in the first quarter,

the newspaper said. As the deleveraging campaign advanced, some companies'

operations and repayment abilities have deteriorated, causing the rise in the

bad loan ratios, but this has improved the quality of assets and reduced risks

in the banking sector, according to an unidentified banker cited by the report.

Financial regulators' stricter regulations also contributed to the rise. All

loans delinquent for more than 90 days must now be categorized as bad loans.

This has raised the bad loan figure, as has the clamp down on illegal practices

of banks moving bad loans off their balance sheets, the newspaper said, citing

another banker.

     The PBOC is keeping liquidity at a reasonable and stable level using

various methods, China Securities Journal said. The PBOC is communicating

frequently with the market and providing more liquidity in the banking system by

using tools such as reverse repos, medium-term lending facility (MLF) loans,

pledged supplementary loans (PSL), and Treasuries deposits, the newspaper said.

Financial institutions have considered the potential for a rise in liquidity

risk and have prepared in advance by issuing negotiable certificates of deposit,

the report said. The liquidity situation may be better than expected because of

the preparation of market participants, the report said.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

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

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