China: Tonight’s Numbers, CNY, and US Rates

Published on October 18, 2016

Key Takeaways

* The range for Q3 GDP estimates submitted by nine departments to Premier Li Keqiang this week came in at 6.7-6.8%, with a slight lean to 6.8%.

* Expectations are for GDP growth to remain at around the 6.7% level for Q4 2016.

* The PBOC will continue to manage the RMB to balance between the USD and a basket of currencies, meaning under current conditions the RMB will depreciate against a stronger dollar while appreciating against the basket, and vice versa if the dollar trend shifts. Officials do not expect the RMB to break 6.7500 this month.

* Chinese officials are fully prepared and expecting a Federal Reserve rate hike at its December meeting.

October 18, 2016

On Sunday, October 9, nine economic departments submitted their forecast data to China’s Central Financial Leading Group (CFLG) and State Council. The National Bureau of Statistics is scheduled to release Q3 economic data tonight, Wednesday October 19, after which Premier Li Keqiang will chair a meeting to analyze the numbers.

All nine departments expect Q3 GDP to come in at least at 6.7% and for CPI to recover from 1.3% in August to about 1.8% in September. More than half – five of the nine departments – expect GDP to come in at 6.8%, including the PBOC and powerful NDRC. Four others, including the Ministry of Finance, expect 6.7%.

The 31 provincial governments also submitted estimates for their respective growth numbers.

Out of the 31, three (the same number as in H1 2016) expected their Q3 growth rate to beat 10%, ten expected their growth rate to come in at between 8 and 10% (also unchanged from H1), eleven forecast 7-8% (one more than in H1), five expected 6-7% (1 more than H1), and two expected GDP under 6%.

On the national level, the NDRC, which expects 6.8% GDP growth, pointed to improvements in consumption and the service sector, and noted industrial output and private investment, which had previously been a drag on the economy, had stabilized and turned positive. In addition, the job market has been solid, and the economy has benefited from stable commodity process.

The economy, however, clearly still faces considerable downward pressures, including overcapacity, debt risk, and a housing glut in third and fourth tier cities.

And when it comes to housing, while most Western economists have focused on the upside bubble risk in the first tier cities, Beijing, perhaps tellingly, still appears to be more focused on stabilizing the glut in the lower tier markets, and Chinese officials are concerned that measures taken to date have proven ineffective.

For example, even though two-thirds of the provinces have been providing subsidies for home buyers in these lower tier markets, these have proven to be no more than a drop in the bucket compared to the cost of housing, and inventories in these markets remain high, even as prices remain low.

Officials expect these subsidies to be increased.

RMB, the Basket, and the Dollar

Chinese officials point out that the RMB exchange rate will continue to “keep a balance” between the US dollar and basket of currencies it is supposed to track.

That means, for example, the RMB will depreciate against the dollar when it is very strong but not as much against the basket of currencies, meaning it will appreciate against those, and vice versa.

Chinese officials consider the recent weakening of the RMB (CNY) to be reasonable. They point out that the six year lows recently in the RMB central parity rate reflect the high volatility of major currencies, especially extreme weakness of the British Pound Sterling, and rising expectations in the markets for a Federal Reserve rate hike by year end, which they also fully expect.

Sources do expect the RMB to stabilize over the last ten days of the month as strong data is released, and to remain stronger than the 6.75 level – at least for the remainder of the month.

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