China: Leadership Worries over GDP Target

Published on October 2, 2015

In spite of broadly weakening manufacturing numbers, a softer global environment, and volatile capital markets, China’s leadership to now has struck a confident note on an end of year bounce back in growth and in hitting its target of 7% GDP for 2015.

And despite widespread market and analyst skepticism over its ability to hit that target, or the reliability of the data inputs that go into Chinese official GDP estimates to begin with, that message has been conveyed forcefully and consistently to both markets and international policymakers, led by Premier Li Keqiang and the State Council.

*** President Xi Jinping from what we understand has, however, expressed concerns on various occasions recently to top economic officials that the 7% goal could be missed. In light of those concerns officials may start to gently distance themselves from a hard 7% goal to one of “around” 7%. ***

*** As insurance, should the growth numbers fail to materialize, Xi has tasked Finance Minister Lou Ji Wei to come up with alternative proposals for economic fiscal stimulus measures that would be both effective and consistent with China’s stated long term plans and objectives. And Lou has come back with a proposal for what would as envisioned now represent around 1 trillion Yuan worth of targeted structural tax cuts that could be rolled out this month, in October, if need be (see SGH, 9/17/15 China: Additional Fiscal Stimulus if Needed). Skeptical investors we believe will almost certainly clamor for more massive infrastructure and fiscal stimulus programs, especially on an acknowledged GDP miss. ***

*** On the monetary policy front, economic officials remain keenly focused on managing currency volatility and stemming the outflow of dollars from the system, especially in light of the supreme political emphasis being placed by Xi on China’s bid to win CNY inclusion in the IMF’s SDR basket at the November meeting of the Fund’s Board. That has and will continue to limit maneuvering room on monetary policy. ***

*** Nevertheless, if the Q3 GDP release expected for October 18 comes out below 7%, even if only missing by a hair, senior economic officials believe the PBOC will be certain to cut BOTH the RRR and interest rates before the end of 2015. If on the other hand GDP manages to hold in at or above 7%, then no additional stimulus will be forthcoming. ***

As to the markets, the massive volatility in the equity markets appears to have subsided, and so long as the Shanghai Composite Index remains above the psychologically important 3000 level, the CSRC (China Securities Regulatory Commission) will not order the National Team to take any aggressive intervention action apart from occasional smoothing measures in equity markets.

Below 3,000 officials will however be concerned not just about psychological and technical sentiment risk to markets, but also about realizing significant losses, especially if a selloff is accelerated or sustained, to China’s National Social Security Fund as well as other state-owned financial institutions.

They are nevertheless pleased that their interventions to date have worked to stem the depreciation pressures on the currency and note that the need for official intervention to prop up the currency has diminished – at least for now.

While the People’s Bank of China appears to have sold we believe $78 billion on the RMB spot market between August 11, the date of the announcement of the looser currency float, and August 31, the PBOC appears to have sold $24 billion in the first 20 days of September in the spot market.

Officials believe the RMB could trade roughly between 6.3500 and 6.3800 for the near future. With the official CNY currently trading around 6.3570, that means they expect the currency could weaken modestly (around 0.5%) in the near term.

The CNY is then eventually expected to settle around 6.3000 by the end of the year if the US Federal Reserve holds off on raising rates, but to weaken to 6.4000 if the Fed were to hike in December.

 

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