MNI China Daily Summary: Wednesday, May 23

     EXCLUSIVE: China's most urgent task for interest rate reform is to clarify

the policy rate that can effectively guide financial markets, Ma Jun, former

chief economist of the People's Bank of China, told MNI in an exclusive

interview. "There are too many 'quasi-policy' rates resembling roles of policy

rates including various repo rates, rates of Standing Lending Facility(SLF),

Medium-term Lending Facility (MLF) and Pledged Supplementary Lending (PSL), in

addition to the traditional benchmark lending and deposit rates. This may

confuse the market," said Ma. Too many "quasi-policy" rates could lead the

market to misunderstand policy signals, distort market expectations and even the

yield curves, said Ma, who is now director of the Center for Finance and

Development at Tsinghua University, one of China's top think tanks.

     EXCLUSIVE: China's currency may receive a boost after more

renminbi-denominated bonds are included in three major global indexes in the

near future, Ma Jun, former chief economist of the People's Bank of China, told

MNI in an exclusive interview. That may be a timely welcome for the market as

concerns grow that the country's shrinking current account surplus may weaken

the value of its currency, said Ma. Becoming part of the global bond indexes

recognizes the value and risk controls of Chinese bond, boosting investors

confidence. Many investments are automatically allocated according to the makeup

of the indexes. "It will effectively boost the yuan and offset the impact of the

narrowing current account surplus," said Ma.

     POLICY: China will cut import taxes on vehicles to 15% from 20-25%, and on

auto parts to 6% from 8-25%, effective on July 1, according to the Ministry of

Finance.

     LIQUIDITY: PBOC injected CNY80 and CNY70 billion in 7-day and 14-day

reverse repos on Wednesday, respectively, with rates unchanged at 2.55% and

2.70%, as the fiscal spending nearing month-end will cushion the impact of

reverse repos to some extent, the central bank said on its website. This

resulted in a net drain of CNY30 billion as a total of CNY180 billion in reverse

repos matured today. CFETS-ICAP's money-market sentiment index closed at 36 on

Tuesday, down from 38 on Monday. 

     MONEY MARKET RATES: 7-day repo average decreased to 2.6842% from 2.6989%

Tuesday, after the PBOC net drain CNY30 billion via OMO. The overnight repo

average increased to 2.5171% from Tuesday's 2.5149%.

     YUAN: The yuan fell to 6.3822 against the U.S. dollar from Tuesday's

closing of 6.3709. Earlier today, The People's Bank of China set the yuan

central parity rate at 6.3773 Wednesday, stronger than Tuesday's 6.3799, the

second consecutive trading day the PBOC has set the parity stronger.

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

3.6600%, up from the previous close of 3.6550%, according to Wind Information.

     STOCKS: Shares declined in Shanghai, led lower by coal miners as the

government required companies to lower coal prices, with Yanzhou Coal Mining

Company down by close to the daily-limit 10%. The benchmark Shanghai Composite

Index closed 1.41% lower at 3,168.96. Hong Kong's Hang Seng Index lost 1.33% to

30,820.43.

     FROM THE PRESS: U.S. President Donald Trump said the U.S. government has

not reached any consensus with the Chinese government regarding the ZTE issues,

China Central Television reported. Trump said he's not satisfied with the

negations last week in Washington led by Chinese Vice Premier Liu He and U.S.

Treasury Secretary Steven Mnuchin. Trump said he hopes the trade talks in the

following days will advance quickly. Trump said he may require ZTE to pay a

penalty of up to $1.3 billion and replace managers, while very strict national

security requirements would be imposed on the Chinese tech giant, according to

state media.

     A total of 300 credit bonds have been cancelled so far this year as the

high level of issuance last year has reduced capital available for the sector,

21st Century Business Herald reported. The cancelled value of bond issuance

reached CNY183.5 billion, the newspaper said, partly due to the CNY2.35 trillion

credit bond issuance ytd last year. New WMP rules tightening regulation on

regulatory arbitrage has forced companies to transfer their non-standard and

illegal financing to the bond market, thus related credit risks have been

transferred to the bond market, the newspaper said, citing an unidentified

fixed-income analyst. As credit bonds expand, more bond defaults could happen,

the newspaper said, citing the fixed-income analyst.

     The PBOC-led newly issued rules regarding improving China's modern

financial system before 2020 stressed the country should control and tackle

short- and medium-term financial risks, Caixin reported. The document stressed

controlling risks in the bond market and monitoring high-leveraged companies

should be strengthened, according to Caixin. According to Caixin, key tasks

before 2020 also include: strictly preventing liquidity risks; resolving issues

of banks' bad assets and local government invisible debt; preventing a property

bubble from triggering financial risks; preventing large fluctuations in the

stock market and excessive speculation on the futures market; and controlling

cross-border capital flow risks.

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

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

[TOPICS: M$A$$$,M$Q$$$,MBQ$$$]