MNI China Daily Summary: Wednesday, October 18

     TOP NEWS: China will pursue a "quality-first" economy under a new vision of

development led by the ruling Communist Party, President Xi Jinping, who is also

the party's chairman, said at the opening of the 19th Communist Party Congress

on Wednesday in Beijing. "We should endeavor to develop an economy with more

effective market mechanisms," make smaller businesses more dynamic, and keep

sound macro-management, Xi said in a speech that lasted more than three hours.

"We will move Chinese industries to the medium-high end of the global value

chain, and foster a number of world-class advanced manufacturing clusters," he

said. China will also further deepen institutional reform in the financial

system to serve the economy and forestall systemic financial risks, Xi said. The

government will improve the framework of regulation backed by monetary and

macro-prudential policies, and push interest rates and exchange rates to be more

market-based, he added.

     TOP NEWS: China will make measures to further facilitate trade and

investment and realize a comprehensive opening-up, President Xi Jinping said at

the Communist Party Congress. China will make efforts to build up its trade

power and largely lift entrance restrictions on foreign investment into China's

market, Xi noted. China will also further open up its services sector and

protect the legal interests of foreign investors, Xi stressed.

     POLICY: The recent two-way movement of the yuan exchange rate against the

U.S. dollar is "normal," Yi Gang, deputy governor of the People's Bank of China,

told MNI during the opening of the 19th Communist Party Congress.

     POLICY: China needs to speed up improving its socialist market economic

system, President Xi Jinping said during his opening speech at the 19th

Communist Party Congress. Economic reform must emphasize an optimized property

rights system and the marketization of resources distribution, Xi said. The

state-owned asset management system also needs to be improved in order to help

increase the value of state-owned assets and prevent losses in the sector, Xi

said, adding that China also needs to develop a mixed ownership economy.

     POLICY: China will insist on the principle that a "house is for living in,

not speculating on" and build up a housing system supported by both rental and

purchasing policies, President Xi Jinping said at the Communist Party Congress.

China will multiply the various channels of its housing supply and meet the

housing demands of its people, Xi said.

     LIQUIDITY: The People's Bank of China injected CNY160 billion in seven-day

reverse repos and CNY140 billion in 14-day reverse repos via open-market

operations. This resulted in a net injection of CNY270 billion for the day, as a

total of CNY30 billion in reverse repos matured. A total of CNY227.5 billion of

Medium-term Lending Facility (MLF) loans also matured on Wednesday, meaning the

PBOC injected a net total of CNY42.5 billion on Wednesday. The CFETS-ICAP

money-market sentiment index ended at 41 on Tuesday, up slightly from 40 at

Monday's close. The lower the reading, the better the liquidity conditions in

the interbank market.

     RATES: The Ministry of Finance sold CNY28 billion and CNY36 billion in

two-year and five-year treasury bills at yields of 3.5619% and 3.7300%,

respectively, in an auction. Bonds with the same maturities traded at 3.5459%

and 3.7647%, respectively, in the secondary market on Tuesday.

     RATES: Money market rates were lower. The seven-day repo average was last

at 2.8700%, compared with Tuesday's average of 2.8718%. The overnight repo

average was at 2.5787%, compared with Tuesday's 2.5935%.

     YUAN: The yuan fell against the U.S. dollar on Wednesday after the People's

Bank of China set the fixing rate weaker for the day. The yuan was last at

6.6250 against the U.S. unit, compared with the official closing price of 6.6160

on Tuesday. The PBOC set the yuan central parity rate at 6.5991, 0.16% weaker

than Tuesday's 6.5883.

     BONDS: The yield on benchmark 10-year China government bonds was last at

3.7158%, compared with the previous close of 3.6430%.

     STOCKS: Stocks rose, with shares of financial institutions leading gains.

The benchmark Shanghai Composite Index closed up 0.29% at 3,381.79. Hong Kong's

Hang Seng Index was 0.06% lower at 28,680.30.

     FROM THE PRESS: The People's Bank of China has stopped regular intervention

in the foreign exchange market, Pan Gongsheng, vice-governor of the PBOC, said

during the opening of the 19th Communist Party Congress, according to the

Securities Times. The yuan exchange rate has remained relatively stable recently

and is taking its direction from the market, Pan said, adding the yuan exchange

rate will be more stable after the congress. (Securities Times)

     "Stability" will remain the core goal of future monetary policy, the

Financial News, a journal run by the People's Bank of China, reported Wednesday,

citing analysts. The PBOC always conducts its operations to maintain the

stability of liquidity in the interbank market and uses a series of monetary

instruments in a flexible manner to ensure that liquidity is "neither loose nor

tight," the report noted. The central bank also carries out fine-tuning

operations and manages market expectations to avoid excessively tight or loose

liquidity, the report said. (Financial News)

     China will further deepen financial reforms to optimize the multi-layer

capital market system and the market-oriented interest rate and exchange rate

formation mechanisms, the China Securities Journal said in a front-page

commentary Wednesday. The deleveraging campaign has made progress, although the

financial system leverage ratio is still high, the commentary said. Direct

fund-raising needs to be increased and weaker sectors, including micro- and

small-size companies, need more financial support, the commentary noted. China

will push forward the opening of its capital account at a stable pace and

improve the efficiency of financial regulation, the commentary added. (China

Securities Journal)

     The contribution of consumption to economic growth has shown an obvious

rise as supply-side reforms continue and demands by the middle class increase,

the 21st Century Business Herald reported Wednesday. The contribution ratio of

consumption to GDP growth rose to 64.6% in 2016 from 47% in 2013, the report

said. Policymakers have noticed the effect of consumption and have taken various

steps to improve consumption, particularly in E-commerce, it said. As increases

in exports and investment slow, consumption will be the main pillar of the

economy in the future, the report noted. (21st Century Business Herald)

     While the yields on corporate bonds have remained relatively stable,

treasury bond yields have risen to their highest level this year, the China

Securities Journal noted in a report Wednesday. The yield on 10-year treasury

bonds broke above 3.7% Monday and has continued to rise, though the spread with

corporate bonds is still low. The divergence of the yields indicates that market

expectations on government policies are not as pessimistic as they were before,

the report argued. Net issuance of treasury bonds will total CNY614.46 billion

in the fourth quarter, a record high level, which will further pressure yields,

the report said. In contrast, the demand for corporate bonds is stable and

qualified companies remain reluctant to float new issues, the report noted. The

bond market will continue its correction as new regulations are launched and

liquidity tightens, so the bond yields have not yet peaked, the report warned.

(China Securities Journal)

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

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

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