Outlook for China s Onshore Market

Transcription

1 Outlook for China s Onshore Market October, 2018 Mizuho Bank (China), Ltd. Treasury Department Copyright (c) Mizuho Bank, Ltd. All Rights Reserved.

2 1-1. Sep. 24: U.S. introduces additional customs duty against China worth USD 200 billion On September 17, the U.S. announced its decision to introduce an additional customs duty on imports from China worth USD 200 billion from September 24 as a means of sanction in reaction to the infringement of intellectual property rights by China. The customs duty is to be 10% at the beginning, after which the rate will be raised to 25% from Approximately 300 items were deleted from the draft list of approximately 6,000 items for the customs duty announced in July, such as smart watches, electrical appliances for consumers, chemical materials, helmets, etc. It seems that influence on consumers was taken into account based on the opinions raised after the release of the draft list. In the market, stock prices and the Chinese yuan appreciated, as there were no more new factors. However, it is likely that this trend will not last for a long period. U.S. President Donald Trump announced that it is possible to introduce an additional customs duty on Chinese products worth USD 267 billion immediately if China introduces a retaliatory measure. China has already announced a retaliatory customs duty worth USD 60 billion, and therefore it is likely for the U.S. to start discussing an additional customs duty worth USD 267 billion against China. Market participants should thus remain cautious about media reports related to the trade frictions between the U.S. and China, as well as the reaction to such reports in the market. Import amount (2017) and amount subject to customs duty in the U.S. and China (USD billion) $505.6 billion Total import amount from China U.S. Amount subject to customs duty on China $267 billion $200 billion (5,745 items) $16 billion (284 items) $34 billion (818 items) $130 billion Total import amount from the U.S. China Amount subject to customs duty on the U.S. $60 billion (5,207 items) $16 billion (1114 items) $34 billion (545 items) Stock prices and the Chinese yuan seeing appreciation in the market: All due to no more new factors 上海総合指数 ( 左軸 ) ドル人民元 ( 右軸 逆目盛 ) 8 Aug. 月 1 日 1 8 Aug. 月 8 日 8 8 Aug. 月 15 日 15 8 Aug. 月 日 8 月 Aug. 29 日 29 9 月 Sep. 5 日 5 9 月 Sep.12 日 9 月 Sep.19 日 September 24, 2018 September 27 and 28, 2018 January 2019 Shanghai Stock Exchange Composite Index USD/CNY (right axis, inverse scale) Important dates regarding the trade frictions between the U.S. and China U.S. introduces customs duty worth USD 200 billion against China; China introduces customs duty worth USD 60 billion against the U.S. U.S.-China ministerial-level dialogue between the U.S. Secretary of the Treasury Steven Mnuchin and Vice Premier Liu He (possible to be cancelled) Rate for the customs duty against China worth USD 200 billion to be raised from 10% to 25% Source: Bloomberg and various media sources 1

3 1-2. Interest rate raised by the FOMC; interest rate outlook indicated the end of rate hikes On September 26, the Federal Open Market Committee (FOMC) raised the policy interest rate from 2.00% to 2.25%, as had been expected in the market. The FOMC also maintained its interest rate outlook from 2018 to 2020, forecasting four interest rate hikes in 2018, three in 2019, one in 2020, and none in 2021, to remain flat from In the statement, the FOMC maintained its economic forecasts unchanged since last time. However, the phrase the stance of monetary policy remains accommodative was deleted. Thereafter, Federal Reserve Board (FRB) Chair Jerome Powell commented on the deletion at the press conference such that the monetary policy remains in an easing posture and that there was no particular reason for the deletion. He also mentioned the possibility of an interest rate hike beyond the neutral interest rate level. As was discussed above, the FOMC is expected to continue gradually raising the interest rate. However, this may have some impact on the market, as the FOMC made it clear when the interest rate hikes would end after continual hikes from December Interest rate outlook by FOMC members (as of Sep. 2018) 2.0 Median Long-term % 80% 60% 40% 20% (%) Possibilities of raising the interest rate at the next FOMC meeting in December 12/19FOMC 後の利上げ確率 Possibility for the interest rate to be raised after the FOMC meeting scheduled for December 19 0% Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep Key points of the FOMC statement for the September 25 and 26 meeting Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. Both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance. In the statement regarding monetary policy, the term the stance of monetary policy remains accommodative was deleted this time. (%) Short-term interest rate and the U.S. dollar index FF 利率上限 interest ( 左軸 rate, ) upper limit (left axis) FF 利率下限 interest ( 左軸 rate, ) lower limit (left axis) Two-year 2 年米国債金利 U.S. ( 左軸 government ) bond ドルインデックス USD index (right ( 右軸 axis) ) (left axis) 0.0 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan Source: Bloomberg 2

4 2. USD/CNY exchange market (From April 2016) Capital outflow increased after the China Shock, leading the Chinese yuan to depreciate June 24 Risk-averse sentiment grew in the market as a result of the Brexit referendum. October 1 The Chinese yuan was included in the SDR currency basket. May 18 The expectation of the U.S. interest rate hikes was enhanced in the minute of the U.S. FOMC meeting. January 4 Following the sharp appreciation of the offshore Chinese yuan, the onshore Chinese yuan also appreciated against the U.S. dollar. November 9 The U.S. presidential election. November 10 The U.S. dollar/chinese yuan exchange rate exceeded CNY 6.80 for the first time since September The Chinese yuan continued to depreciate because of the uptrend in the U.S. dollar exchange market. Control over the depreciation of the Chinese yuan through tightened regulation by the Chinese authorities September 8 The regulations on the foreign risk reserves have been virtually abolished. May 24 The downgrading of the rating of Chinese government bonds by Moody s. May 26 The counter-cyclical factor was introduced in order to prevent the Chinese yuan from depreciating further. January 9 The Chinese monetary authorities discontinued the use of their counter-cyclical factor. Deregulation thanks to the robust Chinese yuan market June 24 The deposit reserve requirement ratio was cut. June 15 U.S. announced an additional customs duty worth USD 50 billion against China. Yuan depreciation due to the trade issues between the U.S. and China August 24 Re-introduction of the countercyclical factor August 3 Re-introduction of the foreign currency risk reserve system Period: April 1, 2016 to September 30, 2018 USD/CNY exchange rate: CNY to Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr Jul Source: Bloomberg 3

5 3. JPY/CNY exchange market (From April 2016) Risk-averse sentiment in the market grew due to the China Shock as well as the outcome of the Brexit referendum July 29 September 21 Although the BOJ decided The BOJ to introduce additional decided to measures of monetary introduce easing, the scale was additional smaller than the market measures of expected. monetary The second quarter GDP easing (yield of the U.S. turned out to curve control be weaker than the market and expected. overshooting commitment). New government under President Donald Trump & the U.S. interest rates appreciated, leading to the appreciation of the U.S. dollar End of the boom after the establishment of the Trump administration December 14 Geopolitical risks grew surrounding the situation in North Korea March 15 and June 14 Decision on the reduction on the ECB asset purchasing program March 21 U.S. interest rate appreciation Depreciation of global stock prices Outbreak of trade problem July 31 The Bank of Japan introduced forward guidance, loosening the control of the yield curve June 24 Risk-averse sentiment grew in the market as a result of the Brexit referendum. January 20 Inauguration of U.S. President Donald Trump November 9 The U.S. presidential election December 13 June 13 The number of expected policy interest rate hikes in the U.S. in 2018 was revised from three to four. 95 ドル USD/JPY / 円 ( 左軸 (left) axis) Period: April 1, 2016 to September 30, 2018 円 / 人民元 ( 右軸 反転 ) JPY/CNY exchange rate: CNY to Apr. Jul Oct. Jan. Apr. Jul Oct. Jan. Apr Jul. JPY/CNY (right axis, inverted)

6 4-1. Outlook for the Chinese yuan exchange market USD/CNY 100JPY/CNY CNY/JPY EUR/CNY October 2018 年 to 2019 January 年 to December 4~6 月 7~9 月 10~12 月 10~12 月 2018 March 2019 April to June July to September October to December 1~3 月 6.50 ~ ~ ~ ~ ~ 6.90 (6.80) (6.75) (6.70) (6.65) (6.65) 5.65 ~ ~ ~ ~ ~ 6.90 (6.18) (6.19) (6.26) (6.33) (6.46) ~ ~ ~ ~ ~ (16.2) (16.1) (16.0) (15.8) (15.5) 7.41 ~ ~ ~ ~ ~ 8.35 (7.96) (7.83) (7.77) (7.78) (7.78) * Outlook for major currencies USD/JPY EUR/USD EUR/JPY October 2018 年 to 2019 January 年 to December ~6 月 7~9 月 10~12 月 10~12 月 1~3 月 108 ~ ~ ~ ~ ~ 108 (110) (109) (107) (105) (103) 1.14 ~ ~ ~ ~ ~ 1.21 (1.17) (1.16) (1.16) (1.17) (1.17) 127 ~ ~ ~ ~ ~ 128 (129) (126) (124) (123) (121) March 2019 April to June July to September October to December Forecast by Mizuho Bank, Ltd. The figures in parentheses are forecasts for the closing rate of each quarter. 5

7 4-2. Outlook for the Chinese yuan exchange market: Summary Chinese yuan U.S. dollar Euro Current situation As a result of the promotion of deleveraging by the Chinese monetary authorities, it became more difficult for private companies to procure funds, while the defaulting of corporate bonds increased, leading to the depreciation of stock prices and the eventual depreciation of the Chinese yuan. Furthermore, due to the intensification of the trade frictions between the U.S. and China, which were unexpected for China, the outlook of the Chinese economy became more uncertain and unclear. As a consequence, the depreciation of the Chinese yuan accelerated further. The Chinese yuan exchange market was also impacted by the depreciation of the currencies of emerging countries, triggered by the situation in Turkey. Outlook While market participants expect the interest rate in the U.S. to be raised in December and three more times next year, the interest rate differentials between the U.S. and China narrowed. Furthermore, toward the end of the year, the demand to buy foreign currencies is expected to grow for the purpose of repatriation, and thus, the Chinese yuan is expected to continue depreciating until the end of the year. However, as U.S. President Donald Trump criticized the appreciation of the U.S. dollar and the depreciation of the Chinese yuan, the depreciation of the Chinese yuan is likely to slow down. Furthermore, once the interest rate hikes in the U.S. come close to their end at the beginning of next year, there would be some effects from the series of fiscal and monetary measures as well as strengthened regulations in China. Therefore, the downward pressure on the Chinese yuan is expected to weaken gradually and the Chinese yuan is likely to start appreciating slowly. Current situation Market participants expect prices to increase in the times ahead as a result of the appreciation of the crude oil price, which is fueling expectations for interest rate hikes in the U.S. as well as concerns over an increase in U.S. debt. As a result, U.S. interest rates are rising, leading to the appreciation of the U.S. dollar. On the other hand, the U.S. dollar is weakening against risk-averse currencies such as the Japanese yen and the Swiss franc. Outlook The Federal Reserve Board (FRB) is maintaining its plan to slowly raise the interest rate. While the U.S. dollar has been rapidly appreciating as a result of the depreciation of the euro and emerging currencies, the overall global economy has now peaked out in the economic cycle, fueling concerns over capital outflow from emerging countries. The key is whether the U.S. economy can keep up with the appreciation of the nominal interest rate in the times ahead. The relative appreciation of the U.S. dollar is likely to continue. However, the U.S. dollar is expected to slowly depreciate against risk-averse currencies such as the Japanese yen, with the failure of the FRB in normalizing the monetary policy. Current situation Until last year, the euro continued appreciating, thanks to expectations for the European Central Bank (ECB) to raise the interest rate at an early point, along with strong figures in economic indices. However, since the beginning of this year, fundamental economic indices have all been deteriorating in the euro zone, while the political situation has been unstable in major member countries and market participants have been unwinding euro buy positions, which reached an all-time high last year. As a consequence, the euro has been weakening. Outlook While political uncertainty persists in the market mainly in Italy, it is therefore possible for the ECB to take some time before raising the interest rate, in order to avert confusion in the market and the economy. As it is possible for political risks to grow in Spain and other countries, if market participants witness the weakening of economic indices in Europe (such as the inflation rate), the euro would find it difficult to continue appreciating, even though the sharp depreciation would be averted thanks to the overall depreciation of the U.S. dollar. 6

8 5. Trends in the Chinese yuan interest rate market Growth support O/N SHIBOR 1W SHIBOR 3M SHIBOR CDB2Y CDB3Y Focus on the control of asset bubbles and the prevention of financial crisis The Medium-term lending facility (MLF), Standing Lending Facility (SLF), and reverse repo rate were raised. RRR cut Slight change in monetary policy toward monetary easing Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Source: Bloomberg 7

9 6. Macro-economic data of China: Summary of economic indices Category Economic growth Economic trends Trade statistics (in USD) Economic index GDP (year-on-year) Manufacturing PMI Trade balance Sep Exports (year-on-year) Imports (year-on-year) Month Result Previous Comment 2018/3Q 6.50% 6.70% Oct Bio USD Bio USD Sep % 9.8% Sep % 20.0% China s economy grew at a slower than expected pace in the 3 rd quarter from a year earlier, marking the weakest rate since 1 st quarter of 2009 during the global financial crisis. The data points to a modest cooling in the world s second-largest economy, as the government s multi-year efforts to tackle debt risks begin to weigh on growth and as a trade war with the United States threatens exports. Recent economic data have pointed to weakening domestic demand with softness across factory activity to infrastructure investment and consumer spending, as a years-long crackdown on riskier lending and debt has pushed up companies borrowing costs. Growth in China s manufacturing sector cooled for the second straight month in October, an official survey showed, suggesting a further loss of momentum in China as it faces rising headwinds from a Sino-U.S. trade row. September exports rose in the fastest pace since February. China s export data has been surprisingly resilient to tariffs, possibly because companies ramped up shipments before broader and stiffer U.S. duties went into effect, raising concerns about a sharper drop in export strength once all tariffs kick in. Growth in overall imports for September instead showed a moderate slowdown, in line with signs the broad cooling in domestic demand. Iron ore imports rose to their highest level in four months as steel mills ramped up output ahead of winter production restrictions. Price statistics CPI (year-on-year) PPI (year-on-year) Sep % 2.3% Sep % 4.1% China s PPI cooled for a third straight month amid ebbing domestic demand, pointing to more pressure on the world s second biggest economy as it remains locked in an intensifying trade war with the United States. Consumer inflation, on the other hand, picked up slightly from the previous month, led mainly by higher food prices, official data showed on Tuesday. Monetary policy Money Supply (M2) Sep % 8.2% Chinese banks extended 1.38 trillion yuan ($ billion) in net new yuan loans in September, more than analysts had expected and up from the previous month. Source:Bloomberg 8

10 7. Upcoming key events China U.S. 〇 Europe Date Indices and events Date Indices and events Date Country Indices and events October 7 Foreign currency reserves October 1 ISM Manufacturing Index October 3 EU Euro area retail sales October 10 to 15 Money supply M2 October 3 ISM Non-Manufacturing Index October 16 Germany ZEW Indicator of Economic Sentiment October 12 Trade statistics October 5 Trade balance October 23 EU Consumer Confidence Index October 16 CPI Employment statistics October 24 EU Markit Eurozone Manufacturing PMI PPI October 10 CPI Germany Markit Germany Manufacturing PMI October 19 GDP October 11 PPI October 25 EU ECB Governing Council Retail sales October 15 Retail sales Germany IFO Business Climate Index Industrial production October 16 Industrial production October 30 EU GDP October 31 Manufacturing PMI October 24 Markit U.S. Manufacturing PMI October 31 EU HICP Non-Manufacturing PMI New home sales October 26 GDP October 29 Personal Income and Outlays October 30 Consumer Confidence Index Japan Date Indices and events October 9 Trade statistics October 19 CPI October 30 October 30 to 31 Unemployment ratio, effective opening-to-application ratio BOJ Monetary Policy Meetings Source: Bloomberg 9

11 Reference (1): Global market: USD/JPY exchange market (From April 2016) Period: April 1, 2016 to September 30, 2018 USD/JPY exchange rate: JPY to June 24 There was a rapid appreciation of the Japanese yen caused by riskaverse sentiment in the market, resulting from the Brexit. September 21 The BOJ decided to introduce additional measures of monetary easing (yield curve control and overshooting commitment). December 14 January 20 Inauguration of U.S. President Donald Trump June 14 Interest rate hike in the U.S. Announcement of the plan to reduce the balance sheet December 13 The FOMC raised the interest rate by 25 basis points. The outlook for three interest rate hikes in 2018 was maintained. March 21 July 31 The Bank of Japan introduced forward guidance, loosening the control of the yield curve April 28 The BOJ unexpectedly decided to maintain the existing monetary policy. July 8 and August 5 The employment statistics of the U.S. turned out to be significantly stronger than expected. May 17 Risk-averse sentiment grew further in the market due to President Trump s problems regarding Russia. April 23 As a result of the first round of voting in the French presidential election, the second round was between Emmanuel Macron and Marine Le Pen. Finally, Macron was elected French president. 95 Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul March 15 November 9 Against market expectations, Donald Trump was elected as the next U.S. President September 21 The FOMC maintained its outlook for an interest rate hike before the end of the year. June 13 The number of expected policy interest rate hikes in the U.S. in 2018 was revised from three to four Source: Bloomberg 10

12 Reference (2): Global market: EUR/USD exchange market (From April 2016) Period: April 1, 2016 to September 30, 2018 EUR/USD exchange rate: USD to June 24 Pressure to sell the euro strengthened, due to the Brexit. October 4 The media reported that the ECB slowed down asset purchase (tapering). The report was denied thereafter. July 8 and August 5 The employment statistics of the U.S. turned out to be significantly stronger than expected. November 9 Against market expectations, Donald Trump was elected as the next U.S. President. December 8 Decision to extend the bond purchasing program June 14 Interest rate hike in the U.S. Announcement of the plan to reduce the balance sheet March 29 The U.K. gave official notification of withdrawal from the EU. May 17 The U.S. dollar depreciated due to President Trump s problems regarding Russia. September 25 Angela Merkel won the election for Chancellor of Germany. June 27 ECB governor Mario Draghi made a hawkish remark, stating the deflationary forces were replaced by reflationary ones and the factors controlling inflation are all temporary ones. October 26 The ECB Committee decided to cut asset purchasing in half. April 23 As a result of the first round of voting in the French presidential election, the second round was between Emmanuel Macron and Marine Le Pen. Finally, Macron was elected French president Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul April 17 German economic indices remained weak, and expectations for an interest rate hike by the ECB were lowered. June 15 The ECB Committee announced its decision to keep a negative interest rate until summer Source: Bloomberg 11

13 Reference (3): Chinese yuan exchange market since : Commencement of the revaluation of the Chinese yuan : Temporary introduction of a fixed exchange rate system after the financial crisis in the U.S.; resumption of the appreciation of the Chinese yuan in : Depreciation of the Chinese yuan once again after the interest rate cut in Nov., despite the Chinese yuan exchange rate fluctuating in both directions 2015: Calculation method for the central parity rate changed by the People s Bank of China on August 11, which meant the devaluation of China's currency (from the CNY 6.21 level to the CNY 6.40 level) 2016: Depreciation of the Chinese yuan against the U.S. dollar to the level seen in 2011, at the beginning of the year; despite the Chinese yuan rallying after the Chinese New Year, after which, another commencement of the depreciation of the Chinese yuan against the U.S. dollar; continued depreciation of the Chinese yuan to its lowest level since 2008 as a result of risk-averse sentiment in the market after the victory of the supporters of the Brexit in the referendum carried out in the U.K. in June, as well as expectations for economic stimulus after the victory of Donald Trump in the U.S. presidential election carried out in Nov. 8.5 U.S. dollar/chinese yuan exchange rate Revaluation of the Chinese yuan by 2.1% on July 21, 2005 China started to reform foreign exchange control, shifting to a managed floating rate system, referring to the currency basket. The Chinese monetary authority announced its plan to enhance the flexibility of the exchange rate. April 14, 2012 Widened the fluctuation band of the yuan s exchange rate March 17, 2014 Widened the fluctuation band of the yuan s exchange rate August 11, 2015 PBOC devalued the Chinese yuan CNY depreciation CNY appreciation Japanese yen/chinese yuan exchange rate CNY depreciation CNY appreciation Source: Bloomberg 12

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