MNI China Daily Summary: Wednesday, Oct 25

EXCLUSIVE: China’s interbank liquidity reached its tightest level since January as economic recovery gathered strength following mid-year lows, but the proportion of traders expecting further easing jumped ahead of key year-end policy meetings, MNI's latest China Liquidity Survey shows.

POLICY: China’s government debt ratio remains "reasonable and under control" despite the budget deficit increasing to 3.8% from 3% following the increase in the national fiscal deficit, according to Vice Minister of Finance Zhu Zhongming.

LIQUIDITY: The People's Bank of China (PBOC) conducted CNY500 billion via 7-day reverse repo, with the rate unchanged at 1.80%. The operation has led to a net injection of CNY395 billion after offsetting the maturity of CNY105 billion reverse repos today, according to Wind Information.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) decreased to 2.0602% from 2.0867%, Wind Information showed. The overnight repo average increased to 1.9490% from 1.9322%.

YUAN: The currency weakened to 7.3150 to the dollar from 7.3075 on Tuesday. The PBOC set the dollar-yuan central parity rate lower at 7.1785, compared with 7.1786 set on Tuesday. The fixing was estimated at 7.3167 by Bloomberg survey today.

BONDS: The yield on 10-year China Government Bonds was last at 2.7275%, down from Tuesday's close of 2.7350%, according to Wind Information.

STOCKS: The Shanghai Composite Index rose 0.40% to 2,974.11 while the CSI300 index increased 0.50% to 3,504.46. The Hang Seng Index was up 0.55% to 17,085.33.

FROM THE PRESS: Overseas central banks and sovereign wealth funds are continuing to increase their holdings of yuan bonds despite rising U.S. bond yields, according to 21st Century Business Herald. Foreign institutions held CNY3.19 trillion of bonds in the interbank market by end-September, accounting for about 2.4% of the total custody volume, according to the latest data by the People's Bank of China Shanghai office. This means foreign investors purchased about CNY10 billion yuan bonds in September, marking the first monthly increase in holdings since June. Foreign investors are buying the relatively stable yuan bonds to reduce portfolio volatility amid falling U.S. bond prices, the newspaper said.

China will face liquidity pressure after the authorities decided to issue CNY1 trillion of additional treasury bonds to support disaster relief and construction, according to Everbright Securities. However the central bank will take action to offset this pressure with liquidity injections using its reserve requirement, MLF, and OMO tools, and therefore the impact is likely to be short term. Guangdong Securities pointed out the additional bonds will allow local governments to better implement proactive fiscal policies to stimulate the economy after a downturn in the property market has impacted their land-sale revenue. (Source: Yicai)

China’s latest move to issue CNY1 trillion additional treasury bonds in Q4 will boost investor confidence, given the A-share market has risen during the previous four times special treasury bond were issued, said an unnamed analyst at a public fund. Following the announcement on Tuesday night, the FTSE China A50 Index Futures rose by 1.5%. U.S. listed Chinese companies were also up, with the NASDAQ Golden Dragon China Index rising by 4%. (Source: Yicai)