Three major points stand out to us from the latest round of communications with senior Chinese economic policymakers:
1 – Major economic indicators show the overall performance of the economy remains stable and continues to move in a positive direction. If the current momentum holds through December, Chinese economic officials expect Q4 GDP to come in at a relatively robust 6.8% (see also SGH Sep. 8, 2017, “China: The Economy and the Next Xi Jinping Era”).
2 – While the RMB has been drifting lower against the dollar over the last few weeks, Chinese officials believe that is largely due to expectations for tax cuts in the US, a normal and modest market response to policy developments, and do not expect any substantial acceleration to the downside in the currency. The Chinese central bank expects the currency to end the year in the same range it is in now, between 6.6000 and 6.6500 CNY to the USD, including after what will be a fully expected rate hike by the Federal Reserve next week on December 13.
3 – The PBoC is alert to the possibility higher US growth could put upside pressure on US rates next year, potentially putting pressure in turn on other major banks’ domestic policy rates. But they expect any spillover to China to be limited. At the upcoming end of year Central Economic Work Conference, Premier Li Keqiang is expected to declare that China will continue to follow “a proactive fiscal and prudent monetary policy,” but government officials also warn and will stress rates in 2018 will be slightly tighter than they have been in 2017. The PBoC communications will take care to manage investor and money market expectations to appreciate that China’s monetary policy will not encourage indefinitely lower for longer interest rates.