MNI China Daily Summary: Wednesday, June 5

     EXCLUSIVE: The trade dispute between the U.S. and China could spread into

the technology and financial sectors, and prompt the use by Beijing of rare

earth minerals as a weapon, if talks produce no deal and relations between the

two sides deteriorate, government advisors told MNI. "We have seen the U.S

extend the conflict into other fields, so we have no choice but to fight back,"

said one advisor, asking to remain anonymous. Restrictions on China's exports of

rare earth minerals - vital for high-tech products like mobile phones - could be

a weapon in a trade war, the advisor said, although for the moment they merely

remain a deterrent. 

     POLICY: China's dispute with the U.S could drag down its foreign trade

growth by 3 to 5 percentage points this year, but Beijing should be cautious

about hitting back at Washington in way that puts American companies on a

blacklist, a government advisor told MNI in an interview. While the Chinese

economy is feeling the effects of the trade dispute with the U.S., Beijing still

has room to help its companies through difficult times, said Zhao Jinping,

former Director-General of the Research Department of Foreign Economic

Relations, affiliated with the Development Research Center of the State Council

(DRC). Zhao saw little chance of an agreement to end the dispute by the G20

summit in Tokyo later this month, barring a significant gesture from Washington,

but insisted that China should be measured in its response to the U.S. use of

"extreme pressure." Particular care should be taken with regards to drawing up

the list of "non-reliable entities" damaging to the interests of China or

Chinese companies, which Vice Minister of Commerce Wang Shouwen has said would

be released soon, Zhao explained, noting the caution was necessary as Beijing

continues to open up the economy.

     DATA: The Caixin China general services PMI index fell to 52.7 in May from

April's 54.5, a sign of a slowing service industry in China. The gauge of

China's smaller service companies is at a three-month low, although still

showing signs of robust growth, Caixin said.

     LIQUIDITY: The PBOC injected CNY60 billion via 7-day reverse repos,

resulting in a net drain of CNY210 billion given that CNY270 billion of reverse

repos matured today, according to Wind Information.

     RATE: The 7-day weighted average interbank repo rate for depository

institutions (DR007) fell to 2.3000% from Tuesday's close of 2.3565%, Wind

Information showed. The overnight repo average decreased to 1.6300% from

Tuesday's 1.7184%.

     YUAN: The Chinese currency strengthened to 6.9088 against the dollar from

Tuesday's close of 6.9130. The PBOC set the dollar-yuan central parity rate

higher at 6.8903, compared with Tuesday's 6.8822.

     BONDS: The yield on the benchmark 10-year China Government Bond was last at

3.2200%, down from Tuesday's close of 3.2350, according to Wind Information.

     STOCKS: The benchmark Shanghai Composite Index fell 0.03% to 2,861.42. Hong

Kong's Hang Seng Index increased 0.50% to 26,895.44.

     FROM THE PRESS: China should impose stricter controls over the export of

rare earth materials and track them through the supply chain, Xinhua News Agency

reported late Tuesday, citing unnamed experts speaking at an NDRC symposium. The

government should strengthen overall supervision on the industry, cracking down

on illegal production and smuggling, Xinhua cited the experts as saying.

     As central banks around the world continue to turn dovish, with cutting

rates, the PBOC may follow the trend and lower policy rates such as the reverse

repo rate, and guide the spread to a "comfortable level", said Ming Ming, chief

analyst at CITIC Securities in a report published today. The PBOC may also

consider further cutting the rate of target medium-term lending facility, so as

to lower the financing cost for private and small companies, Ming added.

     The impact from China-U.S. trade frictions is generally controllable, with

business confidence and market expectation becoming more stable and rational,

the PBOC-run newspaper Financial News said. The corporate confidence index

covering key taxpayers nationwide reversed a decline and rose four pps to 125.23

in Q1 from Q4 2018, indicating increasing willingness for investment and

production, the paper said.

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

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

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