China: RMB “Stable to Strong” through 2016

Published on November 23, 2015

According to wire service reports some “Masters of the Universe” fund managers recently concluded China will have no choice but to massively devalue the RMB in 2016 – by as much as a whopping 30% apparently according to one prognosis.

That most certainly is not the plan as envisioned by the leadership in Beijing.

*** A “2015 Central Economic Work Conference” is going to be convened most probably around December 10, from what we understand, to discuss the risks facing China’s economy. While the leadership in Beijing, including President Xi Jinping himself, has made no bones about the severity of the headwinds they expect the economy to face in 2016, they consider these risks to be reasonably under control. ***

*** Officials are furthermore well aware that market speculators are again raising bets on a RMB devaluation, but their goal and expectation is that for starters economic growth will not fall below the new 6.5% target, with the help of some fiscal spending (see below), and that the RMB will in fact appreciate modestly through 2016. It will most certainly not be suddenly untethered in a massive depreciation as envisaged by some in the markets once China gains IMF SDR status. ***

*** Indeed at the G20 summit in Antalya, Turkey, President Dilma Rousseff of Brazil suggested to Xi that a stable and relatively strong RMB would not only be to the benefit of the “BRICs,” markets, and its global partners, but to China itself. Xi for his part explicitly assured the BRIC leaders, again, that China has no intention of initiating a currency war, has resisted it to now, and that the RMB will be kept stable and relatively strong even as the US Federal Reserve hikes rates beginning next month. ***

IMF SDR and Fiscal Plans

Beijing at this point fully expects the IMF Executive Board to grant the RMB inclusion in its SDR basket when it convenes on November 30 to review the matter.

That does not, however, mean, as many traders expect, that Beijing will suddenly be free or even want to depreciate the currency as soon as it gains the coveted SDR status: that is simply not the way the game has been played for all the false starts the market has had since the August 12 surprise (and nearly disastrous to Chinese markets) loosening of the RMB.

Indeed when it comes to the currency the People’s Bank of China and Ministry of Finance will focus on two main priorities after November 30.

One is to ensure the RMB will in fact meet all the requirements to be included, as they hope, into the SDR by October 1, 2016, once that roadmap is laid out at the November IMF meeting.

The second is to try and lobby for the RMB to constitute 10% of the SDR basket currently comprising of the US Dollar, Euro, Pound Sterling and Japanese Yen, which would make it the third largest weighing in the basket – an ambitious objective for sure.

Crushing its trading partners, the global economy, and triggering a renewed massive bout of capital flight out of the country with a big devaluation is not in that game plan.

Furthermore, communicating their intentions in a credible fashion – over and over again if need be – will make managing currency stability that much easier, and that much less costly (see for example SGH 9/11/15, “China: Fed, Treasuries, RMB, and the G-20 Meeting”).

To wit, the PBoC has been able to gradually lessen its intervention in the spot RMB market to fight depreciation pressures, including in the offshore Yuan market.

Compared with the $78.4 billion dollars sold in the spot market in August and $34.7 billion in September, the PBoC has from what we understand so far sold about $20 billion in November.

While analysts may (and most certainly will) dispute these figures, and point to other, non-official, sources of intervention or piggy-backing in the FX markets, the trend at least is indisputable.

Fiscal Plans for 2015-16

At the upcoming Central Economic Work Conference China’s Ministry of Finance will recommend the central government set a 2016 fiscal revenue growth rate of 6.5%.

The MOF will also suggest Xi and Premier Li Keqiang set the government deficit for 2016 at 1.97 trillion Yuan, which would be 350 billion more than in 2015, spread between the central and local governments.

That would bump the deficit up a bit, by 0.2%, to 2.5% of GDP. That small increase however assumes a more substantial bump on the revenue and spending sides.

Revenues are expected to increase by 1.2 trillion Yuan, from 15.4 to 16.6 trillion, amounting to a 7.8% rise, while national expenditures are expected to increase by 2.4 trillion Yuan, from 17.1 to 19.5 trillion, or by 14%.

Finally, as we have been writing the central government has approved tax cuts totaling 1 trillion Yuan for State-Owned Enterprises, and these will be rolled out over the next six months.

The plan is to front-load those, with 300 billion Yuan taking effect this month, in November, 350 billion Yuan in December, 200 billion in January, 100 billion in February, and 50 billion in March.

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