China’s Premier Li Keqiang presided over a symposium at the China Banking and Insurance Regulatory Commission (CBIRC) last Friday, January 4. The meeting followed Li’s inspection of China’s three state-owned commercial banks – the Bank of China, Industrial and Commercial Bank of China, and Construction Bank of China.
The symposium was particularly significant in marking Li’s first comments on monetary policy since the final Central Economic Work Conference (CEWC) of 2018. It also directly followed the two-day 2019 Central Bank Work Meeting, which had just been held on that day and the day before.
*** Monetary policy support, Li said, should include across the board RRR (Reserve Requirement Ratio) cuts, targeted RRR cuts, and open market operations. While looking forward to a trade truce with the United States, Li laid out a relatively aggressive GDP target for 2019 of around 6.3%, even without a deal, in the middle of the 6.0-6.5% target range laid out by the CEWC on December 19-21 (see SGH 12/24/18; “China: CEWC and Leadership’s Targets for 2019”). ***
*** Coming so soon after the announcement at the start to the new year by the People’s Bank of China of a two-step, 100 basis points cut in the RRR, senior officials interpret Li’s outlook and goals to translate most probably into a further two or three additional cuts in the RRR for this year, for an extra 100-200 basis points of stimulus. That would mean a total stimulus still larger than analyst expectations at the end of 2018 even if, barring more downside surprises, it might be a tad more tempered than we had initially heard in the immediate aftermath of the manufacturing PMI collapse at the turn of the year. ***
*** As to the trade talks commencing today, Chinese officials note that at this stage, and at the Vice-Ministerial level, the initial focus will be for progress on a deal on agricultural products, automobile products, and energy. While the hope is for an agreement even at this early stage where the US could quickly export large quantities of its products to China, these officials note that on a pragmatic level, Chinese companies will be hesitant to stock up before the Spring Festival. ***
They nevertheless optimistically point out that their festival, and new year, is just around the corner, starting February 5 — a mere one month away.
Targeting the “Six Stabilities”
At Friday’s symposium, Premier Li is said to have conveyed that the downward pressure on China’s economy is expected to manifest most strongly in the first half of 2019, and particularly in the first quarter, where growth is expected to be the lowest since the 2008 financial crisis, and lower than any other of the four quarters of 2019.
With that in mind, Li stressed that the government’s economic policies and efforts for 2019 need to be coordinated around achieving “Six Stabilities” — employment, finance, foreign trade, foreign investments, domestic investments, and expectations.
The PBoC, BCIRC, and all state-owned banks are all seen as key institutions in achieving these goals, and with it the desired 6.3% GDP growth target. And monetary policy, too, must be framed around achieving these objectives.
Balancing Cuts and the Yuan
Li stated the priority now is therefore to take further steps to improve capital injection channels to spur economy activity in Q1, through easing liquidity and encouraging credit, especially for Small and Medium Enterprises (SMEs).
Central bank and banking officials still see RRR cuts, especially given the relative stability of the currency, as a key channel for money creation, and one of the most effective instruments for managing liquidity.
But the latest cut was nevertheless divided into two tranches, in large part to ensure the stability of the Yuan, in addition to stretching the stimulus out to address liquidity needs for over the upcoming Spring Festival (see SGH 1/4/19; “China: Trump’s Call to Xi, Weak PMI and Stimulus”).
Even with these, and further expected cuts, Chinese officials do not expect pressure on the Renminbi to build or accelerate and will refrain from intervention.
As things stand, officials expect intervention in the FX markets only if the psychologically important 7.000 region against the US Dollar were again to be threatened.