Chinese Economy, Policy Rates & Renminbi

Forecast: “This, in my view, partly reflects the PBoC’s willingness and ability to use FX reserves to shore up its currency and introduce capital controls to mitigate FX outflows. More broadly, it would indicate that the PBoC sees value in a stable currency.” [My top currency charts, 13 October 2017].

Outcome CNY NEER was stable in a narrow 2% range in the following three months and was trading in the middle of this range in mid-January 2018.

Forecast “Near-term, I think the PBoC may continue to see some value in a broadly stable Renminbi.” [Chinese Renminbi – Squaring the circle, 6 January 2017]

CNY NEER traded in a narrow 2% range in the following month according to my estimates.

Forecast “I have a somewhat different take, namely that markets are rightly discounting some of the more extreme and perverse scenarios, including: […] Capital outflows from China ultimately forcing policy-makers into accepting a Renminbi collapse and shocking a corporate sector with significant dollar-debt.” [Black swans and white doves, 8 December 2016]

Capital outflows remained sizeable in December at about $90bn but the PBoC continued to intervene in the FX market, with its FX reserves falling about $41bn (or $33bn adjusting for estimated currency-valuation effects). The CNY NEER was broadly stable between 8 December 2016 and early January 2017, according to my estimates. Capital outflows fell sharply in Q1 2017 to only $29bn from $160bn in Q4 2016 and $210bn in Q3 2016.

Forecast “Central bank FX reserves are likely to remain under modest downward pressure assuming PBoC continues to intervene in the FX market to keep Renminbi broadly stable in NEER terms.” [Fast and Furious – Market drift, 15 November 2016]

The USD-value of Chinese FX reserves fell a further $110bn in November-December or about $67bn accounting for FX valuation effects. CNY NEER was up 0.6% between mid-November and end-2016 according to my estimates.

Forecast “Likely further rate cuts, slowing growth, flip-flopping of policies to accentuate FX outflows. This will put CNY under pressure and PBoC will intervene in the FX market to slow (but not stop) CNY depreciation. Sizeable FX reserves will thus continue to fall further. Currency depreciation is still more likely than shock-and-awe devaluation.” [What to expect in 2016 – Same, same but worst, 19 January 2016]

Capital outflows of about $640bn in 2016 kept CNY under pressure but CNY NEER weakened only 6.4% and was at end-2016 still 7% stronger than in mid-2014. PBoC intervened to slow Renminbi depreciation and its FX reserves fell about $320bn in 2016 (or $293bn adjusting for estimated currency-valuation effects).

Forecast “Finally, while policy-makers are running out of tools to spur their economies, a number of emerging market central banks, including in China and India, still have room to cut policy rates further.” [Global growth – Down but not out, 13 October 2015]

PBoC cuts its lending rate 25bp on 23 October 2015 and cut banks’ reserve requirement ratio 50bp in February 2016.

Forecast “The temptation is to think that Chinese policy-makers will sacrifice a robust Renminbi in order to spur economic growth but I expect the PBoC to favour a stable currency while the government focuses on pump-priming domestic demand.” [Chinese trade tantrum, 13 July 2015]

CNY NEER traded in a +/- 2.5% range around the level recorded on 13 July 2015 until early February 2016. New loans rose 26% yoy in July 2015-March 2016, moderating the slowdown in GDP growth.

Forecast “An alternative view point is that monthly economic indicators are about to rebound quite sharply. The unofficial Caxin manufacturing PMI data […] and the official non-manufacturing PMI have even over longer time-frames been somewhat better correlated with monthly economic indicators. They too point to a rebound in economic activity in coming months.” [Chinese PMI very sensitive to underlying economic activity, 31 May 2015]

Chinese industrial output growth rebounded to 6.1% yoy in June-October 2016 from 5.9% yoy in January-May 2016 and retail sales growth rose to 10.4% yoy from 10.2% yoy.

Forecast “Precedent suggests that outside of periods of major financial shocks, these bouts of currency depreciation are reasonably shallow and short-lived and typically followed by similarly shallow and short-lived bouts of currency appreciation. It’s a similar picture for the CNY”. [Asian currencies still on the straight and narrow, 15 May 2015]

CNY NEER hit a multi-month low on 15 May 2015 (publication date) but then appreciated 3.3% over the following fortnight according to my estimates.

Forecast “Chinese policy-makers’ generous scope for new and wider reflation tools (including liquidity injections) will support GDP growth, contrary to expectations of an ill-defined “hard-landing” [The global growth story – cause for concern, not panic, 17 September 2014]

PBoC injected significant amounts of liquidity in the banking sector in 2015 and 2016 and GDP growth only slowed modestly from 7.2% yoy in Q4 2014 to 6.8% yoy in Q4 2016.