MNI China Daily Summary: Wednesday, May 9

     TOP NEWS: The Europe Union shares many concerns with the U.S. on China's

overcapacity, technology transfers and market access issues, Hans Dietmar

Schweisgut, ambassador of the EU Delegation to China said Wednesday at a press

conference in Beijing. The bloc will hold high-level economic dialogue and other

meetings with Chinese officials about trade and investment, Schweisgut said. EU

hopes China will open up services and investment for EU companies, and market

access issues are "urgent," which could cause a change in "atmosphere" on the EU

side. Schweisgut stressed. The EU will stick with the Iran Agreement, no country

should simply walk away, he noted. 

     TOP NEWS: China is unlikely to make a major breakthrough any time soon in

its stated push for a market-based interest rate formation system, despite

positive-sounding statements from key government officials and advisors, MNI

understands. A free interest rate mechanism, which China has touted for years,

implies revolutionary changes to its complicated policy framework constrained by

layers of financial regulatory bodies. The current environment simply won't

accept these changes, MNI learned. 

     ANALYSIS: China's exports in the Jan-Apr period rose 13.7% on year to

USD745.73 billion, while imports rose by a stronger 19.6% year on year to

USD668.98 billion, narrowing the surplus to USD76.75 billion, down 22.19% from a

year earlier. The strong rebound of exports was led by continued stable demand

from China's biggest trade partners -- the U.S., the EU and Japan, where

economies continue to perform well. April imports in yuan terms, however, rose

only 11.6% year on year -- almost half of the reading in dollar terms. That is a

result of US dollar's depreciation against Chinese yuan over the last 12 months,

which has dropped over 8% against the yuan in recent one year, MNI calculations

show.

     LIQUIDITY: The PBOC injected CNY60 and CNY40 billion in 7-day and 14-day

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

2.70%, the central bank said on its website. This resulted in a net drain of

CNY100 billion as a total of CNY100 billion reverse repos matured today.

CFETS-ICAP's money-market sentiment index closed at 35 on Tuesday, up from 33 on

Monday.

     MONEY MARKET RATES: The 7-day repo average was last at 2.6879%, up from

2.6809% on Tuesday, after PBOC net drain CNY100 billion via its open-market

operations. The overnight repo average dropped to 2.4846% from Tuesday's

2.5421%.

     YUAN: The yuan gained against the U.S. dollar despite PBOC set a weaker

daily fixing. The yuan rose to 6.3617 against the U.S. unit, compared with the

official closing price of 6.3676 yesterday. The People's Bank of China set the

yuan central parity rate at 6.36733 Tuesday, weaker than Tuesday's 6.3674. The

central bank has set the fixing weaker for three trading days in a row.

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

3.7050%, up from the previous close of 3.6950%, according to Wind Information.

     STOCKS: Shares declined in Shanghai, led lower by securities companies on

expected tighter regulations by China's securities watchdog. The benchmark

Shanghai Composite Index 0.07% lower at 3,159.15. Hong Kong's Hang Seng Index

gained 0.22% to 30,469.36.

     FROM THE PRESS: Downside risks for the yuan due to capital outflows are

controllable, Economic Information Daily said in a commentary. However, caution

is warranted regarding exports, which supported better-than-expected economic

growth last year. Exports are very likely to drag down GDP growth amid slowing

global economic growth and trade frictions between China and the U.S., the

newspaper said. The yuan could also face depreciation pressure as U.S. treasury

yields are increasing, it said. In the future the PBOC is likely to increase

interest rates following the U.S. Fed, and the central bank's recent decision to

reduce restrictions on banks' deposit rates could be regarded as preparation for

a future interest rate hike, the newspaper said.

     The PBOC and other financial regulators will issue rules regulating

financial holding companies, 21st Century Business Herald reported, citing

former PBOC officials and people with knowledge of the issue. The rules aim to

tackle previous problems of FHCs, such as financing of shareholders and

stakeholders, and the legality of capital source, a banker close to regulators

said. The rules are likely to be announced this year as strengthening regulation

on FHCs is urgent because illegal practices in the sector create significant

cross-market financial risks, a former PBOC official said.

     Chinese President Xi Jinping said China and the U.S. should maintain

communication to find a solution for their trade spat and reach a win-win

situation in his call with U.S. President Donald Trump, Xinhua News Agency

reported. Trump said the U.S. highly values the current Sino-U.S. relationship,

and the U.S. hopes to strengthen cooperation with China in different fields and

adequately tackle problems related to the economic and trade relationship,

according to Xinhua. Xi stressed China supports the meeting of Trump and North

Korean leader Kim Jong Un, and China is willing to continue to exert a positive

influence on denuclearization of the Korean peninsula, Xinhua said.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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