MNI China Daily Summary: Wednesday, March 28

     TOPS NEWS: Liu He, China's newly-elected Vice Premier and Chinese President

Xi Jinping's trusted economic advisor said China needs to further deepen reform

and opening of its financial sector based on market rules this year, the

official Xinhua News Agency reported. Preventing and resolving financial risks

should be "priority of all priorities" for financial regulation, Liu said. The

coordination role of the Financial Stability and Development Committee among

different financial regulators needs to be strengthened, Liu said. Liu also

stressed that monetary policy needs to remain prudent and neutral;, while

maintaining reasonable and stable liquidity.

     ANALYSIS: While the PBOC is more willing to allow the market a greater role

in yuan levels, it is nearing the end of its tolerance. Exports are likely to

suffer from the trade tussle with the U.S. and further turbulence in the forex

market is the last thing policymakers wish to see. The recent sharp surge of the

yuan has pushed the currency back to the level seen before the 2015 devaluation,

which may be the boundary of the PBOC's comfort zone. For the onshore CNY

market, 6.25 against the dollar would be a key level to test the central bank's

resolve. 

     LIQUIDITY: The PBOC skipped OMO on Wednesday, stating that the increasing

fiscal expenditure towards month-end can absorb the impact of maturing reverse

repos and keep liquidity condition at a "reasonable and stable" level. This

resulted in a net drain of CNY10 billion after maturity of the same amount of

reverse repos. CFETS-ICAP's money-market sentiment index closed at 43 on

Tuesday, down from 46 on Monday

     MONEY MARKET RATES: 7-day repo average rose to 2.8965% from 2.8578% on

Tuesday, after PBOC net drained CNY10 billion via its open-market operations.

The overnight repo average dropped to 2.5770% from Tuesday's 2.5867%.

     YUAN: The yuan slid against the U.S. dollar after PBOC set a stronger daily

fixing. The yuan fell 0.02% to 6.2788 against the U.S. unit, compared with the

official closing price of 6.2728 yesterday. The People's Bank of China set the

yuan central parity rate vs the U.S. dollar at 6.2785 on Wednesday, stronger

than Tuesday's 6.2816. Today is the third day in a row that the central bank has

set the fixing stronger.

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

3.7400%, up from the previous close of 3.7200%, according to Wind Information.

     STOCKS: Shares declined in Shanghai, led lower by agricultural product

companies, with Great Sun Foods down close to 5%. The benchmark Shanghai

Composite Index closed 1.40% lower at 3,122.29. Hong Kong's Hang Seng Index

dropped 1.66% to 30,278.54.

     FROM THE PRESS: North Korean leader Kim Jong-un has visited China from

Sunday to Wednesday, official Xinhua News Agency reported. In his meeting with

Chinese President Xi Jinping, Kim said the relationship between China and North

Korea is unshakable, and the strategy to advance the relationship with China

will not change under any condition. Kim said denuclearization of the Korean

Peninsula is their unchangeable stance, which "is able to be solved. "Kim said

North Korea is determined to transform its relations with South Korea into a

cooperative relationship and hold meetings of leaders of both sides, as well as

meet with U.S. officials. Kim said during this negotiation process with South

Korea and the U.S., North Korea will strengthen strategic communication with

China. Xi said further developing the two countries' relation is "the only right

choice," which will not change because of anything or at any time, and the two

sides should exchange ideas regarding important issues.

     In the medium to long term, the yuan's outlook still depends on the

fundamentals of the domestic and global economy, Securities Times said in a

front-page commentary. Positive market sentiment and Sheep-Flock Effect may be

the main reason for recent appreciation. China and the U.S. will not make the

same mistake as Japan when it depreciated the yen in an attempt to reduce trade

surplus with the States, both sides may be more likely to negotiate to solve the

problem.

     The U.S. trade deficit with China is the by-product of U.S. dollar being

the world's reserve currency, and is a cost the U.S. has to put up with, said Gu

Xueming, head of the Chinese Academy of International Trade and Economic

Cooperation under the Ministry of Commerce, according to Economic Daily. If

trade conflicts escalate, China may further expand the scope of sanctions of

U.S. agricultural products, as well as retaliate on U.S. aircraft, vehicle, and

integrated circuit products, Gu said. The U.S. action to increase tariffs on

Chinese export of $60 billion in general does not have a big impact on China's

trade, Gu said. China is drafting a guidance to increase imports and enhance the

trade balance, which will be issued soon, he added.

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

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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