Chinese policymakers started the year off with the PBoC’s RRR cut announcement. The central bank also reiterated its prudent stance to monetary policy, adding a “flexible” element. The PBoC statement included guidelines for: an improvement in countercyclical adjustments to maintain reasonably ample liquidity, credit growth and social financing, falling in-line with economic development. A deepening of the interest rate market and loan rate liberalisation are also high on the agenda. Further RRR cuts will be targeted to ease funding difficulties suffered by specific SMEs. Moreover, keen to “resolutely win the battle” against increasing financial risks, China Banking and Insurance Regulatory Commission (CBIRC) unveiled guidelines to shore up the financial sector, and announced measures to open up the nation's domestic financial market further and reduce real economy funding costs. Regulators are also looking to firm up default risk, by using direct restructuring, M&A and bridge-banking.
The takeaway here is that ammunition is sufficient, and unlike in the past policymakers will not indiscriminately stimulate the economy, rather tweak policy to deal with any material downside risks. Inflation was flat at 4.5%yoy in December versus market expectations of a 4.7% rise, so this may take some pressure of policy deployment. The rise in FX reserves to US 3.1079tn in December, due to favourable valuation effects, coupled with stable capital outflow in 2019 should also take some pressure off policymakers.
The recent renminbi appreciation against the dollar (~0.6% at the time of writing), boosted by improved sentiment, is expected to continue; especially with the currency caveat included within the workings of the Phase 1 trade deal. Following its annual work meeting the PBoC reiterated its stance on allowing the market to play a decisive role in settling the renminbi exchange rate and maintain currency stability within a reasonable range.
Interestingly, China Foreign Exchange Trade System (CFETS) announced its revision to the RMB Index weights (effective Jan 1 2020). Key changes, based on updated trade data, include another reduction in the USD from 22.40% to 21.59% and increase to the EUR weighting, to 17.40%, from 16.34%. China’s Global Times said the change “shows the fading role of the dollar in the currency basket as the trade war between the world’s top two economies has weighed on bilateral trade.” The US and China are all set to ink the Phase one deal, which is due to be signed next week (Jan 13-15). The initial deal does not cover more contentious issues (e.g. technology, subsidies and SoEs), so it is anyone’s guess what the next phase will bring and whether an agreement will be reached ahead of the US election; growth downside risk remains.
Staying with growth risks, the World Bank trimmed its growth forecasts for China this year highlighting downside threats from a re-escalation of trade tensions. Although the Bank did say it expects world growth to modestly rebound to 2.5% (from 2.4% in 2019), the “outlook is fragile,'' adding, “even this modest rally could be disrupted by any number of threats”. The report also cited the Euro Area and US as potential detractors from global growth. Our understanding of the report is one of global economic uncertainties with more risks to the downside than the upside, currently. Recent policy moves and guidelines issued by Chinese policymakers should therefore help mitigate some downside risks and support economic growth and internationalisation.