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EXCLUSIVE: Chinese policy banks are boosting onshore dollar borrowing to help sop up excess liquidity in U.S. currency as the People's Bank of China avoids direct intervention in foreign exchange markets, policy advisors and analysts told MNI.

REALITY CHECK: China's retail sales look set to slow in May from the sharp rebounds in recent months driven by the low year ago base comparisons, as an overall willingness to spend has not yet returned to pre-pandemic level and sporadic Covid-19 outbreaks could still disrupt local consumer markets, analysts told MNI. Overall sales are seen 12.6% higher y/y in May, 5.1 percentage points slower than gains in April, said Su Jian, director of the National Center for Economic Research at Peking University.

LIQUIDITY: The PBOC injected CNY200 billion through one-year medium-term lending facilities with the rate unchanged at 2.95%. The operation was intended to roll over CNY200 billion MLFs maturing today and keep the liquidity reasonable and ample, the PBOC said on its website. The PBOC also injected CNY10 billion via 7-day reverse repos with the rate unchanged at 2.20%. In total, the central bank net drained CNY10 billion as CNY20 billion reverse repos matured today.

RATES: The seven-day weighted average interbank repo rate for depository institutions (DR007) increased to 2.2294% from the close of 2.1516% on June 11, the last working day before the Dragon Boat Festival, Wind Information showed. The overnight repo average rose to 2.0971% from 2.0012% last Friday.

YUAN: The currency weakened to 6.4021 against the dollar from Monday's close of 6.3914. The PBOC set the dollar-yuan central parity rate higher at 6.4070, compared with the 6.3856 set on Friday.

BONDS: The yield on 10-year China Government Bonds was last at 3.1425%, down from Friday's close of 3.1475%, according to Wind Information.

STOCKS: The Shanghai Composite Index fell 0.92% to 3,556.56, while the CSI300 index lost 1.11% to 5,166.56. The Hong Kong's Hang Seng Index edged down 0.71% to 28,638.53.

FROM THE PRESS: The PBOC is expected to add net liquidity when rolling over the maturing CNY200 billion medium-term lending facility on Tuesday to fill a possible liquidity gap in the second half of June, the China Securities Journal reported citing analysts. Liquidity may tighten this month with the accelerated issuance of local government bonds, increased forex purchases by overseas-listed companies for dividend payments and the maturing of more interbank deposit certificates, the newspaper said. Liquidity is unlikely to be significantly tightened in the future as the PBOC may also inject via reverse repos, though volatility may increase, the Journal said citing Song Xuetao, chief analyst at Tianfeng Securities.

The Chinese yuan will face depreciation pressure in the second half as the U.S. dollar may rebound on accelerated recovery and tightening of monetary policy, said the PBOC-run newspaper Financial News citing analysts. The Federal Reserve is expected to release a signal of QE reduction in Q3 amid increased inflation, and China will not follow up any interest rate hikes quickly, possibly leading to further narrowed spread over the two countries' interest rates, or even a reversed spread that may push the dollar stronger, the newspaper reported the analysts as saying. The U.S. and other developed countries are expected to basically achieve herd immunity in Q3, and the growth gap may narrow if the Chinese economy slows down in H2 while the U.S. recovery speeds up, the newspaper said.

The G7 and its communique about China are far more symbolic than practical, and the Chinese do not need to take them seriously, the Global Times said in a commentary, following the bloc's statement that criticized China over issues including human rights in Xinjiang, Hong Kong autonomy and Taiwan. China should concentrate on doing its own affairs well, which will be the most powerful response against G7 interventions, although tactically it needs to pay some attention to them to protect China's global standing, the newspaper said. China must ensure that global affairs not be determined by a small number of Western powers, which can sacrifice other nations' interests, the Times said.

MNI London Bureau | +44 203-586-2225 |