SGH Report – China: FX, Rate Hikes, and Credit – Postscript from IMF Meetings

Published on April 26, 2017

The Chinese delegation to last weekend’s spring IMF meetings, led by PBOC Governor Zhou Xiaochuan and Finance Minister Xiao Jie, consider the most significant accomplishment of their four days of meetings in Washington DC to have been the forging of a consensus on exchange rates and monetary policy with the United States. In the broader IMF meetings, they also discussed China’s growth outlook, and measures being taken to curb China’s rapid credit expansion.

** In bilateral talks with the United States, the two sides agreed that too strong a dollar would not be conducive to President Trump’s economic stimulus plan, and despite previous accusations they were engineering a weak currency, that too weak a Renminbi would likewise not be conducive to President Xi Jinping’s current supply side structural reform plans.

** Chinese officials expect the RMB to remain largely steady against the US Dollar as capital outflows continue to ease this year. If, as they expect, China were to maintain a 6.7% GDP growth through the second half of 2017, they expect the RMB to perhaps even appreciate a bit against the Dollar in the first half of the year and through 2017.

** The Chinese delegation, after a series of discussions with senior US officials including NEC Director Gary Cohn, Treasury Secretary Steve Mnuchin, Federal Reserve Chair Janet Yellen, and Fed Vice-Chairman Stanley Fischer, felt the Fed and the Trump Administration may be at slight odds in their outlook for the dollar, with the administration favoring a weaker dollar while the Fed continued to pencil in another two rate hikes this year that may boost the dollar.

** We understand that the Chinese relayed they were confident the Chinese economy could withstand two more Fed hikes this year, but expressed caution over the Fed’s plans to reduce its balance sheet – perhaps due to the still massive size of China’s FX reserves and US Treasury holdings. After their meetings, Zhou is said to have reassured his Chinese colleagues that the Fed would not conduct or discuss any outright sales from its treasury portfolio under Yellen’s leadership (that does not preclude rolling off maturing bonds).

** For their part, both Zhou and Xiao expressed confidence in China’s 2017 economic outlook. If the current momentum were to continue, they expect growth could hit 6.7% again this year, the same as 2016.

**Xiao noted to IMF Managing Director Christine Lagarde that tax revenues had come in strong in the first quarter of 2017, up 11.8% year on year, reflecting strength in the overall economy, and Lagarde is said to have indicated the IMF may revise its forecast for Chinese growth up again from its just released forecast of 6.6% this year.

** Indeed, this sense of confidence on the growth outlook has given Beijing the room to advance structural reform, contain credit expansion, and improve efficiency. Officials expect strong consumer spending, fiscal support for infrastructure, and structural reforms that enhance productivity in heavy industries to continue to support China’s economy. As things stand, they believe the first half GDP for China could possibly come in as high as at 6.8%.

** The Chinese delegation also went on to assure the IMF they take the warnings over their debt levels seriously, especially corporate debt. Since Guo Shuqing took over as Chairman of China’s Banking Regulatory Commission (CBRC), the CBRC has reined in corporate loans backed by multiple guarantors in a bid to curb financial risk posed by chains of companies offering their own credit to support less creditworthy peers.

** The CBRC has begun identifying these risks associated with cross-guarantees, arrangements between two or more companies to support each other in acting as mutual guarantors to obtain bank loans. Chinese officials finally expressed confidence they would rein in China’s rapid credit growth.

Back to list