China Watch A closer look at China’s currency moves
Group Economics Emerging Markets Arjen van Dijkhuizen, Roy Teo +31 20 628 8052,
13 August 2015 •
The PBoC’s recent adjustments to the exchange rate regime have caused quite some market turmoil worldwide.
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Still, they make sense as the de facto CNY peg to the strong USD was hurting competitiveness and not sustainable.
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We also think the authorities want to show commitment regarding liberalisation, with a view to the IMF’s SDR decision.
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We expect some more currency weakness, although the authorities will be constrained by several stability concerns.
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The moves help to support and reinflate the economy, but we expect easing to be stepped up should growth deteriorate.
PBoC adjusts fixing rate, triggering depreciation
background, ending the peg to the USD, currently one of the
After having tied the Chinese yuan closely to the US dollar
strongest currencies worldwide, looks quite prudent.
since March, the PBoC surprised markets this week by adjusting the USDCNY fixing by a cumulative 4.7% from 11-13
… and to show some commitment on liberalisation …
August. This adjustment triggered a 3.5% depreciation of the
Another main goal is to show commitment to further currency
yuan versus the US dollar so far. These developments had
liberalisation in the run-up to the IMF’s decision on RMB
quite an impact on global financial markets, leading to
inclusion into the SDR basket. The IMF recently indicated that
weakening equities and Asian currencies, but supporting
further liberalisation is needed, while hinting to postpone the
Treasuries and Bunds.
SDR decision to 2016. After the authorities had already announced financial liberalisation measures in early 2015, they
De facto CNY peg to USD has become ‘too expensive’
now show their preparedness to make the exchange regime
Indices, 2010 = 100
more flexible. Still, recent developments on the stock market
160
are a reminder of the fact that liberalisation efforts in China
150
often comes in the form of ‘two steps forward, one step back’.
140
Sometimes, the authorities come with short-term stabilisation
130
measures, running counter to longer-term reform goals.
120 110
… but there are also constraints
100
Meanwhile, the PBoC also faces constraints. The ‘stability-
90
oriented’ authorities will likely not tolerate too much CNY
80 08
09 10 REER (CPI-based)
11
12 13 JPY per CNY
14 15 EUR per CNY
Source: Thomson Reuters Datastream
weakness, as that may trigger more capital outflows and would raise the repayment burden of entities with high USDdenominated debts. It is quite early to assess how the authorities will weigh goals and constraints going forward.
Regime shift a step to restoring external competitiveness In our view, the PBoC’s surprising twist serves two policy goals. The authorities try to support and reinflate the economy
Taking into account the latest developments, we have changed our yuan forecasts to 6.55 per end-2015 and 6.75 per end-2016 (for more detail, see today’s EM FX Weekly).
by preserving export competitiveness. The poor export performance this year (with exports falling by 8.3% yoy in July) partly reflects the real effective appreciation of the CNY, which had been de facto tied to the USD since March. The CNY has become particularly strong vis-à-vis the JPY and the EUR, reflecting the BoJ’s and ECB’s unconventional QE policies. Exports to Japan and the EU contracted by 13% and 12.3% yoy in July. The real effective exchange rate has risen by almost 10% since the start of last year. Against that
Imports remain in contraction mode too Imports remained in contraction mode for the 9th consecutive month, falling by 8.1% yoy. While this weak number highlights domestic demand issues, lower commodity prices have once more affected import values too. Still, CNY weakening could be yet another factor in preventing Chinese imports from recovering. Meanwhile, China’s trade surpluses remain very high. Although capital outflows have risen since late 2014, we are still of the view that China’s external position is strong
2
China Watch: A closer look at China’s currency moves – 5 August 2015
given its external surpluses and huge FX reserves covering
to a six-year low of -5.4% yoy (June -4.8%). While this clearly
1.5 year of imports and total external debt fully.
highlights the weakness of China’s industrial sectors, faced with oversupply, low commodity prices certainly also played a
Activity data did not improve further in July
role in pushing PPI even more into the red. Other inflation
% yoy
numbers for July were less dramatic. Headline inflation rose to
25
14 12
20
a 9-month high of 1.6% yoy (June 1.4%), helped by rising pork prices. Core inflation remained stable at 1.7% yoy. Finally, house prices seem to have bottomed out, as recent policy
10
initiatives have led to improving sales and construction activity
8
in the real estate sector, at least in the largest cities.
6
New loans surge on stock market measures
15 10 5
The latest lending data also showed a mixed picture. New
4 08 09 10 11 12 Industrial production (lhs) Bloomberg GDP estimate (rhs)
yuan loans jumped to a 6.5 year high of CNY 1.48 tn, breaking
13 14 15 Retail sales (lhs)
with seasonal patterns. Growth of M2 rose to a one-year high of 13.3% yoy (June: 11.8%). However, this acceleration was
Sources: Bloomberg, Thomson Reuters Datastream
mainly driven by the actions taken in June and July to stabilise the stock market, causing lending to non-bank financial
July activity data disappoint
institutions (including China Securities Financing Operation) to
Recent activity data point to ongoing weakness, particularly
surge. New lending to corporates and households actually fell
within the industrial sectors. Industrial production slowed to
in July. This was also illustrated by the drop of aggregate
6.0% yoy in July (June 6.8%). So did fixed investment and retail sales, although marginally. After rebounding to 6.9% yoy in June, Bloomberg’s monthly GDP estimate dropped to 6.6% in July. The manufacturing PMIs published in early August also
financing, to a 10-month low. Although aggregate financing typically falls sharply in July, the drop to CNY 719 bn was below market expectations.
pointed to industrial weakness, with Caixin’s index falling to a two-year low of 47.8. Meanwhile, the services PMIs still show
More support likely Although China faces a number of downside risks (see our
resilience, highlighting the ongoing divergence between a
China Watch published last week), we are still of the view that
struggling manufacturing and healthy services sectors.
the authorities have many tools at their disposal to manage risks to growth and financial stability. The recent CNY moves
PPI keeps falling, house prices show recovery
are just another form of policy easing, but we expect the PBoC
% yoy
8
10 8 6 4 2 0 -2 -4 -6 -8
6 4 2 0 -2 -4 -6 11
12 13 Headline inflation (lhs) Producer price inflation (rhs)
14 15 Core inflation (lhs) House prices (rhs)
Source: Thomson Reuters Datastream
to continue with other easing steps as well to keep growth close to its 7% target and prevent a hard landing. We have currently penciled in one more 25 bp policy rate cut and 100 bps in RRR cuts, next to ongoing fiscal stimulus such as the recent launch of an infrastructure investment programme to be financed by state-policy banks. Should data continue to disappoint we anticipate even more easing to come. In conclusion In our view, the changes in China’s exchange rate regime are a first step towards restoring external competitiveness and towards introducing a more market based exchange rate regime. We do not think that the devaluation of the yuan will
PPI keeps falling, other inflation numbers less concerning
now trigger a currency war given that it is not too aggressive,
Meanwhile, the latest inflation data presented a mixed bag.
while other countries also recognise that China’s economy
The most eye-catching number was the further drop of
faces challenges. Official reactions from other countries are in
producer price inflation (for the 41st consecutive month), falling
line with this view, as they are (relatively) benign so far.
3
China Watch: A closer look at China’s currency moves – 5 August 2015
Key forecasts for the economy of China 2012
2013
2014
2015e
2016e
GDP (% yoy)
7.7
7.7
7.4
7.0
7.0
CPI inflation (% yoy)
2.6
2.6
2.0
1.5
2.0
-3.0
Budget balance (% GDP)
-1.6
-1.9
-2.0
-2.5
Government debt (% GDP)
15
15
15
17
19
Current account (% GDP)
2.5
1.9
2.0
2.5
2.0
Gross fixed investment (% GDP)
44.5
44.6
44.2
42.0
41.5
Gross national savings (% GDP)
49.0
48.4
47.9
46.5
45.4
USD/CNY (eop)
6.3
6.1
6.2
6.6
6.8
EUR/CNY (eop)
8.2
8.4
7.5
6.6
7.8
Budget b alance, current acc. for 2015 and 2016 are rounded figures
Source: EIU, ABN AMRO Group Economics
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