China’s Q2’17 economic data releases have remained robust, taking a number of market makers by surprise. China’s economy expanded by 6.9% yoy in the second quarter, against market expectations for 6.8% growth, industrial production and retail sales numbers also surprised to the upside. Stronger domestic demand coupled with the stable manufacturing sector, off the back of a marginal pick-up in global growth conditions, have helped maintain economic stability amid the government’s push to deleverage. This resilient data will no doubt allow policymakers further room to maintain the deleveraging programme, in support of the real economy.
Reigning in systemic financial risks remains one of the government’s top priorities, as highlighted at the fifth National Finance Work Conference, which came to a close on Saturday. Conference Chair, President Xi Jinping stated that financial risks remain an ‘eternal theme’. As such a new regulatory body, the Financial Stability and Development Committee, was established under the State Council. This new ‘super-regulator’ will be administered by the PBoC and is aimed at harmonising monetary, fiscal and industrial policies, whilst providing financial sector reform, supervision and regulation. The main ‘targets’ include the likes of aggressive insurance companies, online financial institutions and local governments.
At the conference, Mr. Jinping emphasised that the deleveraging of State Owned Enterprises (SOEs) is of ‘utmost importance’ adding that ‘zombie’ corporations must be ‘properly handled.’ Highlighting them as a source of risk, the president also stated that strict controls will be enforced to ensure that local government debt is brought under control, with each held permanently accountable. Meanwhile, Premier Li Keqiang stated that a fine balance between deleveraging and prudent monetary policy will need to be maintained. As such the PBoC is expected to take on a larger role in dealing with financial system risks, with Xi saying he aims to strengthen the central bank’s role in macroprudential management as well. Currently we see no change to China’s de facto policy rates, however, the central bank could look to tighten OMO rates further in the medium term.
As for financial reform, the president would like to see the financial sector open up in an orderly manner. He also called for a deepening in the exchange rate mechanism to prudently promote renminbi internationalisation and capital account convertibility. He would also like to see the steady promotion of financial sector openness, particularly for foreign investors, and encouraged financial innovation to support the ‘Belt and Road Initiative’.
Earlier Huang Yiping, a member from the PBoC’s monetary policy committee, reportedly told the Financial News that the PBoC could allow the currency greater (long-term) flexibility, expand its free floating range and reduce intervention in foreign exchange markets; no doubt giving the currency a further boost. The renminbi has today extended its gains against the dollar for the seventh straight trading session, helped by strong macro data, and recent comments from the president reiterating the need to keep the exchange rate basically stable at a reasonable equilibrium level. We continue to view the renminbi as being undervalued and expect longer term appreciation against the broadly weaker dollar, especially as market confidence in the renminbi appears to be strengthening, with devaluation expectations shrinking.