MNI China Daily Summary: Wednesday, September 26

     TOP NEWS: China President Xi Jinping said Wednesday China should become

more self-reliant as it develops its economy and manufacturing sector amid

rising trade protectionism, the official People's Daily reported. It's also

becoming harder to gain advanced technology from other countries, Xi said during

his visit to a railway experiment center in Heilongjiang Province.

     TOP NEWS: The city of Beijing announced Wednesday it would prohibit

construction of stand-alone residential villas, according to a statement on the

website of the city's economic planning agency The eastern and western districts

of the Chinese capital will stop construction of new residential property and

large property projects such as hotels and offices. The measures are aimed at

enhancing high-quality development and moving away from "non-capital functions"

for Beijing, the statement said.

     ***COMMENTS: Beijing property regulation tends to set the trend, so similar

measures could be seen in other cities, especially developed ones.

     POLICY: Barclays expects Chinese policymakers to "tolerate additional

market-driven CNY depreciation over the coming quarters as U.S. tariffs are

imposed, economic activity continues to moderate, and downside growth risks

persist". Poor EM investor sentiment and higher USD returns are also likely to

support further CNY weakness versus the USD, Barclays said, adding it forecasts

the CNY at 6.95 at year end (6.60 previously). It expects USDCNY to remain at

around 6.95 over the forecast horizon, consistent with a stable CNY CFETS NEER

and representing c.10% depreciation since March-April 2018, more than offsetting

the effects of U.S. tariffs implemented to date on the price of Chinese exports

for U.S. consumers.

     POLICY: MSCI is considering increasing the weight of China's A shares in

its indices. This came after Bloomberg reported that FTSE Russell is set to

announce China A-Share inclusion in its relevant indices at some point this

week.

     LIQUIDITY: The People's Bank of China (PBOC) skipped open market operations

on Wednesday, resulting in net drain of CNY40 billion in liquidity as CNY40

billion reverse repos matured today, according to Wind Information. The central

bank said banking system liquidity is at a relatively high level due to

quarter-end fiscal expenses, which can absorb the impact of reverse repo

maturities. A total of CNY290 billion reverse repos will mature this week.

CFETS-ICAP's money-market sentiment index closed at 44 on Tuesday, up from 39 on

Friday -- the last trading day before China's Mid-autumn Festival holiday.

     YUAN: The yuan rose to 6.8762 against the USD from Tuesday's closing of

6.8770. The PBOC set the central parity rate weaker for a second trading day at

6.8571, compared with 6.8440 on Tuesday. The currency continues to trade within

its tight range, receiving no support from the surge in Chinese stocks and the

rise in interest rate swaps. USDCNH has also begun to diverge from USDTWD after

trading in lockstep for most of the year, with the latter trading at 6-week

lows. The 21-day rolling correlation between the two has fallen to just 0.08

from as high as 0.96 in July. TWD strength should support the yuan, but we

continue to see underperformance in real effective terms. While the recovery in

stocks significantly reduces the risk of a large drop or depreciation in the

Chinese currency, it does not preclude further gradual weakness given the

ongoing rise in U.S. rate expectations.

     MONEY MARKET RATES: The benchmark seven-day deposit repo average increased

to 2.6935% on Wednesday from 2.6860% Tuesday, while the overnight average rose

to 2.5405% from 2.5256%: Wind Information.

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

3.6805%, up from Tuesday's close of 3.6754%, according to Wind Information.

     STOCKS: The Shanghai Composite Index closed 0.92% higher at 2,806.81. Hong

Kong's Hang Seng Index rose 1.04% to 27,786.05. Reports late on Tuesday that

MSCI is considering increasing the weight of China's A shares in its indices

helped the CSI 300 to add 1.6%, with the Hang Seng gaining a similar amount as

Hong Kong returned from a market holiday. The reaction of Chinese rate markets

to the Fed's upcoming decision will be telling and traders will look to any

indication as to whether the PBOC will look to keep the rate spread stable. The

equity market rally significantly reduces downside tail risks for the yuan as it

gives more scope for the PBOC to tighten monetary policy in the event of

currency weakness.

     FROM THE PRESS: The yuan is not likely in future to drop as much against

the dollar as it did Tuesday, when it tumbled the most in two months, China

Securities Journal reported. Tuesday's drop was due to an increasing need for

dollars amid the holiday season, the newspaper said, adding that a holiday

interruption to yuan trading prices also contributed to the drop. Authorities

are strengthening macro prudential management and the use of the so-called

counter-cyclical factor into yuan fixing is also helping to reduce fluctuations

in the exchange rate, the newspaper said.

     A-shares may rebound soon, Financial News reported. The inclusion of

A-shares in FTSE Russell's indices would add USD12 to USD15 billion to the

market, the newspaper said, citing analysts including Zhang Xia from China

Merchants Securities. Despite the China-U.S. trade war, tight financial

regulation and credit problems for some Chinese companies, A-shares should also

be supported by government measures to support economic growth, the newspaper

said.

     Hebei should look into using clean energy for heat, and prioritise heating

for citizens, said province head Xu Qin, according to Hebei Daily. As part of

efforts in the first year of China's three-year action plan to reduce air

pollution, the province will take measures in the fall and winter, with specific

tasks for cities and counties, but factories' production cannot be abruptly

stopped or limited without careful consideration, Xu asserted, according to the

Daily.

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

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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