China: More on RMB and Stimulus Policies

Published on January 5, 2016

Premier Li Keqiang presided over a highly unusual meeting held in Zhongnanhai on the last day of 2015, on December 31, convened to compile China’s 13th Five-year plan.

At that meeting, among other topics, Li acknowledged in the starkest terms to date what has been an ongoing subtle yet significant shift in currency policy going into 2016 (SGH 12/22/15, “China: 2016 Targets from the CEWC”). He is reported to have said:

“President Xi and I … said at the Central Economic Work Conference (CEWC) that the RMB against USD will remain weak for most of next year, but that the level of RMB against USD by the end of next year would be almost the same level as this year if China’s economic situation in the second half of next year is better than the first half. At this meeting, I would like to add that the RMB against USD could fall … next year if China’s economy in the second half of next year cannot meet our expectation, and the USD remains very strong.”

*** This was the first time Premier Li explicitly affirmed that the central government can and will tolerate further RMB devaluation, indicating in the process the central government’s determination to loosen the RMB peg to US dollar. However, added a senior economic official, President Xi and Premier Li have still pledged to keep the RMB basically stable – with even a slight appreciation bias – against a basket of currencies in 2016. ***

*** From what we understand Beijing is nevertheless well aware it will need to continue to draw on substantial FX reserves to stabilize markets even as it loosens it grip on the currency, and the CEWC has agreed that China’s FX reserve policy for 2016 should not allow for reserves to fall below the $3 trillion mark by the end of 2016 from the $3.44 trillion level in November. That nevertheless implies a rather substantial war chest of some $400 billion of reserves if needed – without including unofficial interventions. ***

*** On the monetary policy side, according to senior economic officials, the People’s Bank of China is ready to lower its Reserve Requirement Ration (RRR) for commercial banks by 0.5 percentage points by the second half of January. Meanwhile, the RRR for qualified financial institutions supporting small and micro businesses and agriculture would be lowered by another 0.5 percentage points. For now, at least, the PBoC appears to have ruled out a cut in interest rates in January. ***

Markets and Further Measures

On the fiscal front, the CEWC has also set the 2016 fiscal deficit to GDP ratio to “at least 2.5 percent” from the 2.3 percent level in 2015. That number is however expected to end up exceeding 3% of GDP.

Separately, sources from a provincial government and public investment fund talked up prospects for the Chinese stock market, and economy, this year despite the disastrous open to the year.

They stressed that the new IPO mechanism – a registration-based IPO system – that will take effect from March 1st 2016 should help smooth that process, and that as more fiscal and monetary policies take effect the macroeconomic environment will gradually stabilize and improve in 2016. And they expect these factors to support the stock market, with one even boldly predicting, for what it is worth, that it is highly likely the Shanghai Composite Index will climb over 4,000 by the end of 2016.

And despite market concerns over the weak manufacturing PMI numbers released over the holidays, services have held in fairly well, and officials still see China’s economic expansion as broadly in line with the government’s expectations.

Indeed, one of the key government economic agencies we believe is estimating Q4 GDP to have come in at 6.95%, compared with the 6.93% registered in Q3. Officials maintain they are confident that while they indeed expect a modest deceleration in the economy, GDP will grow by 6.7%-6.8% in 2016.

Finally, government sources generally believe (and hope) the property sector nationwide will experience a mild recovery and expect investment in the property sector to register about a 5 percent growth level in the second half of 2016.

That is largely due to the central government and local governments having introduced a series of measures targeted specifically at significantly decreasing excessive housing inventory in 2016, and bringing overall housing inventory levels back to “normal” levels by the end of 2017.

Back to list