This week we heard that China has unleashed a raft of measures to counter the potential ill effects of the Trump Trade Wars on its economy, and in particular the renminbi. We have often spoken of the nation’s plethora of firepower which it can deploy to maintain stability, and recent actions have displayed just how these can be utilised. ‘Proactive’ fiscal policy and ‘reasonably adequate’ liquidity conditions were stated as the main ingredients to support growth and structural reform. Policymakers will also continue to maintain social financing at appropriate levels and a number of projects will be brought forward to meet development goals and better the country’s livelihood. Local governments will also be encouraged to issue around RMB 1.35tn (~USD 200bn) in special bonds which will be used to fund local infrastructure projects. Whilst monetary policy will be neither tight nor loose.
In terms of fiscal easing, the government is said to be looking at tax and fee cuts, and more companies will receive preferential policies by way of increased deductions in R&D expenditure and taxable income. According to Xinhua, at a government meeting yesterday, Chinese Premier Li Keqiang reportedly stated that “China will better utilize its fiscal and financial policies to support the expansion of domestic demand, structural adjustment and boost the development of the real economy.” Adding that “China will keep its macro policies stable, refrain from resorting to a deluge of strong stimulus policies, and the government will exercise targeted and well-timed regulation in the face of external uncertainties to make sure the economy performs within a reasonable range, the meeting said.” China’s most recent GDP release for Q1’18 remains above policymakers’ target of “around 6.5%”, at 6.7%yoy; so if necessary, there is room for growth to soften without any drastic monetary policy easing requirements, or use of the nation’s huge USD 3.1tn fx reserves.
As for the renminbi, it breached 6.82 against the dollar this morning, which has spooked markets. This move lower followed Trump’s comments that the renminbi “has been dropping like a rock” adding that some countries, including China “have been manipulating their currencies and interest rates lower”. As we have mentioned time and time again, we do not think a weaker currency is in China’s interests as it pushes forth with consumer-driven growth reform. Also, according to a spokesman, “China doesn't want to boost its exports through competitive devaluation while the nation's sound economic fundamentals are providing support to the currency”. With the renminbi having fallen to 12-month lows currently, and policymakers highlighting their confidence in recently announced measures to temper further depreciation and maintain stable economic growth, we continue to believe that over the longer term the renminbi will continue to broadly appreciate against the dollar, we, therefore, see this as a renminbi buying opportunity.