MNI China Daily Summary: Wednesday, May 15

EXCLUSIVE: The People’s Bank of China is set to restart treasury trades on the secondary market after a 16-year hiatus as it prepares to support long-term Chinese government bond issuance over the next few years, however, it will aim to limit its role and maintain a small portfolio as it pushes fiscal discipline, policy advisors and economists told MNI.

LIQUIDITY: The PBOC conducted CNY125 billion via 1-year MLF and CNY2 billion via 7-day reverse repo, with the rates unchanged at 2.50% and 1.80%, respectively. The operation has led to no change to the liquidity after offsetting the CNY125 billion MLF and CNY2 billion maturity today, according to Wind Information.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) decreased to 1.8087% from 1.8402%, Wind Information showed. The overnight repo average decreased to 1.7100% from 1.7610%.

YUAN: The currency strengthened to 7.2195 to the dollar from 7.2377 on Tuesday. The PBOC set the dollar-yuan central parity rate lower at 7.1049, compared with 7.1053 set on Tuesday.

BONDS: The yield on 10-year China Government Bonds was last at 2.2980%, up from Tuesday's close of 2.2880%, according to Wind Information.

STOCKS: The Shanghai Composite Index decreased 0.82% to 3,119.90 while the CSI300 index fell 0.85% to 3,626.06. The Hang Seng Index decreased 0.22% at 19,073.71.

FROM THE PRESS: The Chinese yuan will remain stable supported by the adequacy of foreign exchange policy tools and the firm attitude of policymakers in stabilisng the currency, China Securities Journal reported citing analysts. The market has priced in the Federal Reserve’s delayed rate cut, and the U.S. dollar may temporarily open up downside space should U.S. inflation data fall short of expectations, said Li Liuyang, foreign exchange expert at China International Capital Corporation. The continued economic rebound and net inflow of foreign capital in bond and stock markets will also support the yuan, the newspaper said citing analysts.

China’s plans to issue ultra long term special treasury bonds will further expand investment and consumption demand, with the potential for an additional 0.25 pp of GDP growth per year if the bonds stimulate CNY1 trillion of additional investment and consumption annually, according to Lian Ping, president of Guangkai Chief Industrial Research Institute. The bonds will act as a transfer payment to regional jurisdictions to alleviate local financial burdens and will promote high quality development through support for major national projects, Lian added. (Source: Securities Daily)

Authorities should enrich the funding sources for risk disposal of high-risk financial institutions, establish a multi-level fund guarantee mechanism and clarify the responsibilities and order of losses for different entities, 21st Century Business Herald reported citing an article by the National Financial Regulatory Administration. The newspaper noted the banking sector’s risk disposal incurred a large amount of bailout costs. The liquidation of Baoshang Bank caused CNY67.6 billion of deposit insurance funds in 2020, while Liaoyang Rural Commercial Bank drove CNY36.9 billion of costs in 2022. Out of 4,364 banking financial institutions 337 were reported in the “red zones” by Q2 2023, mainly city commercial banks and rural banks, a central bank report showed.