MNI China Daily Summary: Wednesday, September 20

EXCLUSIVE: China’s commercial banks’ squeezed interest margins helped hold the loan prime rate (LPR) steady in September, however, the People’s Bank of China will likely cut its policy rates to guide down the reference lending rate by 5-10bp later this year to bolster the slowing economy, economists and analysts told MNI.

POLICY: China will not experience deflation in the future as the economy continues to recover, but prices are still low which requires attention, Cong Liang, deputy director at the National Development and Reform Commission, told reporters on Wednesday.

POLICY: The People’s Bank of China (PBOC) will take prompt actions to curb any overshoot of the yuan exchange rate, while enhancing support to the economy via expanding credit and reducing funding cost, a senior official of the Bank told reporters on Wednesday during a briefing.

POLICY: China's Loan Prime Rate remained unchanged on Wednesday, according to a People's Bank of China statement, in line with market expectation following the PBOC's decision to keep a key policy rate steady on Sept 15.

LIQUIDITY: The PBOC conducted CNY205 billion via 7-day repo and CNY86 billion via 14-day repo on Tuesday, with the rate unchanged at 1.80% and 1.95%, respectively. The operation has led to a net injection of CNY226 billion after offsetting the maturity of CNY65 billion reverse repos today, according to Wind Information.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 2.0426% from 1.9799%, Wind Information showed. The overnight repo average increased to 2.0219% from 1.8726%.

YUAN: The currency weakened to 7.2978 to the dollar from 7.2943 on Tuesday. The PBOC set the dollar-yuan central parity rate lower at 7.1732, compared with 7.1733 set on Tuesday.

BONDS: The yield on 10-year China Government Bonds was last at 2.7100%, flat from Tuesday's close, according to Wind Information.

STOCKS: The Shanghai Composite Index fell 0.52% to 3,108.57, while the CSI300 index decreased 0.40% to 3,705.69. The Hang Seng Index was down 0.62% to 17.885.60.

FROM THE PRESS: The People’s Bank of China may continue to inject liquidity via the 14-day reverse repo, as the excess reserve rate of the banking system remains low and government bond issuance, and credit expansion may lead to a widening funding gap in the second half of September, said Wang Yifeng, analyst at Everbright Securities. The PBOC will likely cut interest rates in Q4 to help further expand domestic demand, boost credit, stabilise expectations and prop up the real-estate sector, said Chen Li, chief economist at Chuancai Securities. Zhang Jun, chief economist at Galaxy Securities, said the central bank may lower the reserve requirement ratio again during the year to increase the counter-cyclical adjustment of monetary policy. (Source: China Securities Journal)

Policymakers should expand aggregate demand and boost the domestic economy using proactive fiscal and monetary policies in order to stabilise the yuan, according to Tan Xiaofen, professor at the School of Economics and Management, Beihang University. In an article written for Yicai, Tan said authorities need to increase financial subsidies for SMEs and further optimise and extend preferential tax policies. The central government should consider expanding treasury bond issuance to replace some local debt to reduce the burden on local governments. (Source: Yicai)

Second-tier cities are likely to completely exit from restrictive measures introduced when the housing market was overheating in the past, as 11 cities including Wuxi and Wuhan announced to drop all curbs on home buying so far in September. While the four first-tier cities may relax in accordance with the degree of market recovery, and it is more likely to make district-specific policy adjustments, said Chen Wenjing, market research director of China Index Academy. (Source: Securities Times)