MNI China Daily Summary: Wednesday, September 6

     TOP NEWS: China has held military exercises simulating the takedown of

"incoming missiles" from North Korea, according to a report in Hong Kong's South

China Morning Post published late Tuesday. The drills, held in the early hours

of Tuesday, were conducted in the area of Bohai Bay, in waters that separate

China from North Korea, the report said, citing the official Chinese military

news website 81.cn. The website said the Chinese military's missile-defense

force shot down the missiles in the simulated attack on the first attempt.

     TOP NEWS: The possibility that the People's Bank of China will cut banks'

required reserve ratio (RRR) is not high, because the signal that such a move

would send is not in line with the intent of the financial deleveraging

campaign, PBOC advisor Sheng Songcheng said at a Shanghai forum held Sept. 1,

according to a report in Wednesday's The Paper. The Chinese economy is still in

an "L" shape, and it is still not the right time to start a cutting cycle of the

RRR, Sheng said. The PBOC will choose to inject any needed liquidity via money

market tools -- the Medium-term Lending Facility and the Standing Lending

Facility -- whose signaling effect is not as strong as that of RRR cuts, Sheng

said, stressing that this was his personal view. (The Paper)

     LIQUIDITY: The People's Bank of China injected CNY20 billion in seven-day

reverse repos and CNY20 billion in 28-day reverse repos via open-market

operations Wednesday, Wind Information, a Shanghai-based financial data

provider, said. This resulted in a net drain of CNY120 billion for the day, as a

total of CNY160 billion in reverse repos matured on Wednesday. Wednesday was the

first day that the PBOC conducted 28-day reverse repo operations since July 17.

The CFETS-ICAP money-market sentiment index ended at 39 on Tuesday, the same as

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

the interbank market.

     RATES: Money market rates were mixed after the PBOC drained CNY120 billion

in liquidity via open-market operations. The seven-day repo average was last at

2.8064%, higher than Tuesday's average of 2.7640%. The overnight repo average

was at 2.5975%, lower than Tuesday's 2.6080%.

     RATES: The Ministry of Finance reopened and sold CNY40 billion in 10-year

treasury bonds at a yield of 3.6341% in an auction on Wednesday. The yield was

lower than the rate of 3.6641% that bonds with the same maturity fetched in the

secondary market on Tuesday. The bonds were first auctioned on Aug. 3 with a

coupon of 3.59%.

     RATES: The Ministry of Finance reopened and sold CNY40 billion in one-year

treasury bonds at a yield of 3.4753% in an auction on Wednesday. The yield was

higher than the rate of 3.4214% that bonds with the same maturity fetched in the

secondary market on Tuesday. The bonds were first auctioned on Aug. 3 with a

coupon of 3.33%.

     YUAN: The yuan rose against the U.S. dollar after the People's Bank of

China set a stronger daily fixing. The yuan was last at 6.5456 against the U.S.

unit, compared with the official closing price of 6.5516 on Tuesday. It has

strengthened in three of the last four trading days. The PBOC set the yuan

central parity rate against the U.S. dollar at 6.5311 on Wednesday, stronger

than Tuesday's 6.5370. Today's fixing was the highest since May 18 last year.

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

3.6358%, up from the previous close of 3.6298%, according to Wind, a financial

data provider.

     STOCKS: Stocks were up, led higher by the ferrous metals sector. The

benchmark Shanghai Composite Index closed up 0.03% at 3,385.39. Hong Kong's Hang

Seng Index was 0.48% lower at 27,608.32.

     FROM THE PRESS: The increasing reliance on algorithmic models could be

creating a major risk of market disruption by underpricing geopolitical risks,

the Australian Financial Review warned in a report Wednesday. The more investors

rely on such models, the more likely it is that the algorithms will resemble

each other -- for instance, by responding more to changes in the outlook for

interest rates than to growing geopolitical risks, the report argued. On

Tuesday, the yield on benchmark 10 year U.S. Treasury bonds slumped to a 2017

low of 2.07% even as investors were stocking up on "safe haven" assets -- such

as bonds and gold -- amid rising tensions between the U.S. and North Korea. Some

analysts worry that U.S. bond yields are reacting more to the comments by

Federal Reserve officials than to the threat of a military confrontation with

North Korea, indicating there is a major, algorithm-induced mispricing of risk

in the financial markets. This, in turn, could run the risk of a situation like

that in 2007, when algorithm-based trading by LTCM and other firms caused a

market crash that required government intervention, the report argued.

(Australian Financial Review)

     The strong appreciation of the yuan exchange rate opens more leeway for

monetary policy so a required reserve ratio cut has become a policy option, the

21st Century Business Herald reported Wednesday, citing Guan Tao, former head of

the balance of payments division at the State Administration of Foreign Exchange

(SAFE) and now a research fellow with the 40Forum think tank, and Ding Zhijie,

assistant president of the University of International Business and Economics.

The current upward momentum of the yuan exchange rate has several positive

effects, including curbing capital outflows and reversing one-way depreciation

expectations, Guan said. The yuan exchange rate's reference to a trade-weighted

basket of 24 currencies is just part of the transition to a floating exchange

rate. The influence of a strong yuan on exports should be dealt with in a

market-oriented way and the financial market should not count on the

"counter-cyclic factor" to solve the problem, Guan noted. Cutting the RRR

remains a possible choice to inject liquidity and would be an important move to

normalize the currency policy, Ding said. (21st Century Business Herald)

     Real estate developers have not slowed the pace of land purchases, even

after the imposition of stricter controls on the sector, so property investment

growth may beat expectations this year, the Shanghai Securities News reported

Wednesday. Land sales in 300 cities totaled CNY2.20 trillion in the first eight

months, a gain of 34% year-on-year. This indicates how optimistic developers are

about the outlook for the sector, the report said. The top 60 real estate

companies listing on the mainland or Hong Kong stock markets invested CNY1.034

trillion to buy land in the first eight months, fully 52% more than CNY682

billion in the same period last year, the report noted. Investment growth will

edge down slightly to 6.3% to 6.5% y/y growth in 2017, from the 7.4% gain posted

last year. (Shanghai Securities News)

--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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