China’s Premier Li Keqiang shared his views on the economy, policy objectives, and global financial conditions with IMF Managing Director Christine Lagarde in a conversation that took place on the morning of January 28, Beijing time, at her request.
From what we understand, Li made the following five points to Lagarde:
1 – Li acknowledged China’s economy is still facing downward pressures, but emphasized that the central government has the tools and confidence to manage the economy towards a 6.5% to 7% GDP growth target range for this year. He maintained the leadership is not overly nervous about growth this year and will focus largely on structural adjustments and reform, particularly supply-side structural reforms. He believes China will maintain continued steady economic growth in 2016 on the back of a strong service sector, solid employment, higher income, and savings growth.
2 – China will not face deflation. Li actually expects CPI this year will be higher than it was last year. Furthermore China is not headed for a hard landing. Indeed the economic slowdown will push China’s industrial sector to adjust supply to demand. Growth may still slow in the first half of the year, but is expected to come in higher in the second half.
3 – The Chinese economy is resilient and Beijing has room to manage the country’s economy through a combination of policy measures. China will continue to implement a proactive fiscal policy and rely more on fiscal policy than on monetary policy. The leadership will consider raising the budget deficit to about 3% of 2016 GDP, higher than the official targets (see SGH 1/5/16, “China: More on RMB and Stimulus Policies”). They will, however, remain cautious about cutting interest rates further from here, as well as lowering banks’ reserve requirement ratios (see below). The benchmark deposit rate will in any case not fall below one percent in the future, due to concerns over hot money and outflows. The current benchmark deposit rate is 1.5%.
4 – While the Renminbi has dropped against the dollar, the exchange rate has remained basically stable against a basket of currencies, and there is no basis for a continued depreciation of the RMB. Beijing has no intention of boosting exports through a devaluation of the RMB and no intention of launching a currency war. As one of the SDR basket currencies, the RMB must be pegged to a basket of currencies, and China is committed to keeping the exchange rate basically stable at an “adaptive and equilibrium level” this year.
5 – China is willing to deepen its dialogue on economic development and macroeconomic policies with the IMF and other international institutions, and will send positive signals on the global world economic recovery, growth, and confidence in markets.
Rates, FX and Markets
Separately, senior officials in Beijing relay that in order to prevent further depreciation of the RMB the State Council will keep the current reserve-requirement ratio unchanged until at least late February.
Instead of lowering the RRR, the People’s Bank of China has pumped a net already of nearly 2 trillion yuan into the financial system via open-market operations in January, the biggest in four years.
The PBoC will continue to add a net 1.2 trillion yuan into the financial system in February, especially during the Spring Festival Golden Week holiday.
In order to avoid any short-term liquidity strain during the holiday, the PBoC will conduct operations daily until Feb. 19, compared with the usual twice-weekly practice. Over the same period, the PBoC will expand access to a short-term lending tool to an additional seven banks.
While there has been some pressure on the currency, officials believe the PBoC’s recent measures to stabilize the RMB have been largely effective.
The State Council and PBoC hope and expect that the offshore RMB (CNH) will remain near current levels in February not just against a basket, but against the dollar as well, especially from now through the holidays.
The PBoC will nevertheless try to intervene less in the spot markets, as long as the RMB does not experience sharp selloffs or “cliff-style” devaluation pressures, and they repeat there is no basis for a continued sharp depreciation of the RMB, and no possibility of a one-off 10-15% percent devaluation of the RMB as widely speculated in markets.
Officials also strike a sanguine note on the stock market.
Even though China’s stock market experienced its worst monthly fall in January, the magnitude of the market reaction does not reflect the underlying real economy.
Officials will urge investors to focus on the real economy, which is more resilient than “foreign investors” think. They hope and expect the stock market will keep going up before the holidays.