MNI China Press Digest May 31: Yuan, Liquidity, Capital Flow

The following lists highlights from Chinese press reports on Monday:

• The Chinese yuan may weaken against the dollar should the Federal Reserve tightens monetary policy to control inflation, or if the U.S. economy rebounds sharply, the PBOC-run Financial News said in a commentary. The Fed's withdrawal from easing may deflate asset bubbles, cause a sharp adjustment in U.S. asset prices, and trigger risk aversion in the global markets, it said. In turn, funds may flow back to the U.S. and lift the dollar index, the newspaper said. China's exports may also weaken as overseas supply capacity increases, further pressuring the yuan, the newspaper said. Yuan rose above 6.36 against the dollar last week, the highest in more than three years.
  
• The Chinese yuan will remain strong in the short term after rising above 6.4 against the U.S. dollar, but room for further appreciation may be limited and it may weaken slightly in the second half as domestic growth momentum slows, according to a report by CICC. The current account surplus may narrow in the following months as Chinese exporters face declining profits amid rising raw material prices, FX exchange and freight costs while overseas production capacity gradually recovers, the report said. Capital inflow will also fluctuate as China-U.S. rate spreads are unlikely to widen further, the report said.
• The PBOC may increase liquidity injection through daily reverse repos in June if market rates rise as local government special bond issuances peak and rising PPI fuel tightening expectation, the Securities Daily reported citing Wang Qing, chief analyst at Golden Credit Rating. New special bonds could reach up to CNY800 billion in June, compared to CNY351.9 billion in May, the daily cited Wang as saying. The PBOC has continued to inject a small amount of CNY10 billion daily via 7-day reverse repos since May, seeking to guide the market rates around the current policy rates of 2.2% the newspaper said.
• The world should strengthen cooperation to prevent financial risks, improve cross-border capital management policy tools and the monitoring system for cross-border capital flow so to prevent hot money from disrupting emerging markets, Caixin reported citing Liang Tao, vice chairman of the China Banking and Insurance Regulatory Commission. Liang warned that financial vulnerabilities have increased, and great attention should be given to the rapid rise of U.S. bond yields and surging commodity prices, said Caixin.