Outlook for China s Onshore Market

Transcription

1 Outlook for China s Onshore Market May 15th, 2018 Mizuho Bank (China), Ltd. Treasury Department Copyright (c) Mizuho Bank, Ltd. All Rights Reserved.

2 1-1. Topics (1): Update regarding the trade friction between the U.S. and China While President Trump has promised a reduction of the trade deficit, market participants are increasingly concerned about a series of trade sanctions and retaliatory measures. In particular, President Trump has announced his plan to cut the trade deficit against China and Mexico in order to improve the trade balance by at least USD 100 billion, and therefore market participants need to continue keeping an eye out for actions taken by the U.S. and China in the times ahead. However, President of China Xi Jinping promised at the Boao Forum for Asia held on April 10 that he would further promote economic reforms. As he chose to promise the execution of his policy at a time when the risks of a trade war were growing, it can be seen as an important message to avoid developing a trade war to a full extent. Summary of the customs duties enacted by the U.S. as trade sanctions and the retaliatory customs duties by China U.S.: In response to the results of the investigation based on Article 301 of the U.S. Trade Act of 1974, regarding the infringement of intellectual property rights, the U.S. instructed the enactment of sanctions to the Office of the United States Trade Representative (USTR). (March 22) China: China introduced a new customs duty on the U.S. for steel and aluminum products, as well as for some agricultural products. (April 2) U.S.: The U.S. announced that an additional customs duty of 25% would be levied on 1,300 products from China. (April 3) China's import/export trade value with the U.S. (USD, 100 millions) 対米輸出額 Value of exports to the U.S. 対米輸入額 Value of imports from the U.S. China: China announced an additional customs duty of 25% on U.S. products for all 106 categories (including soybeans, corn, automobiles, chemical products, etc.) worth approximately USD 50 billion. (April 4) 0 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17 In its trade with the U.S., China s value of exports is significantly larger than the value for imports, and therefore it is considered difficult for China to take retaliatory action in the times ahead by increasing import items on which an additional customs duty will be levied against the U.S. Source: Bloomberg and other public information 1

3 1-2. Topics (2): 1% cut of the reserve requirement ratio by the People s Bank of China On April 17, the People s Bank of China (PBOC) announced its decision to cut the reserve requirement ratio (RRR) by 1%, targeting most commercial banks such as major commercial banks, stock-listed commercial banks, and foreign banks, etc. This change was applied as of April 25 and was requested to be used for the repayment of the medium-term lending facility (MLF). This decision to cut the RRR is a measure equivalent to a fund supply of approximately CNY 1.3 trillion. However, if this is to be absorbed by the repayment of the MLF of approximately CNY 900 billion, the net fund supply would only be CNY 400 billion, the same level as a normal MLF operation. The impact of this in the market was therefore limited. Since the cut of the RRR in March 2016, the loan balance through the MLF has expanded approximately four times as much. As a result of the repayment made this time, the interest rate cost for MLF loans will be lower, which is considered to cut the funding cost for banks. 8,000 Summary of the cut of the reserve requirement ratio People s Bank of China (CNY, billions) Repayment of MLF: CNY 900 billion Decrease in the reserve deposit as a result of the RRR cut by 1%: CNY 1.3 trillion Commercial banks Significant increase in the loan balance through the liquidity supply Reserve requirement ratio and the market interest rate ,000 SLF 4,000 MLF PSL 2,000 0 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 5 預金準備率 Reserve requirement ( 左軸 %) ratio (left axis, %) 3Three-month ヶ月物 SHIBOR( SHIBOR 右軸 (right %) axis, %) Source: Bloomberg and other public information 2

4 2. USD/CNY exchange market (latest trends) Although the U.S. dollar/chinese yuan exchange market opened at a low level, the U.S. dollar strengthened thereafter, along with the appreciation of U.S. interest rates. - At the beginning of April, risk-averse sentiment grew in the market due to concerns over a trade war between the U.S. and China, which led the U.S. dollar to appreciate against the Chinese yuan. Thereafter, President of China Xi Jinping promised at the Boao Forum for Asia to further promote economic reforms for China, and this gradually mitigated concerns over a trade war, stabilizing the U.S. dollar/chinese yuan exchange rate at around CNY In the middle of the month, the U.S., the U.K., and France attacked Syria due to its alleged use of chemical weapons, which was a factor to increase geopolitical risk. However, the impact on the market was limited. After a slight appreciation of the Chinese yuan against the U.S. dollar to the CNY 6.28 level, the exchange rate remained flat. - At the end of the month, U.S. economic indices were released with relatively strong figures. Under such conditions, the 10-year U.S. government bond yield appreciated and exceeded 3%. Along with the acceleration of the appreciation of the U.S. dollar index, the U.S. dollar appreciated also against the Chinese yuan at a faster pace, and the U.S. dollar/chinese yuan exchange rate reached the CNY 6.34 level for the first time in two months. U.S. dollar/chinese yuan exchange rate and the U.S. dollar index (From April 2017) ドルインデックス USD index (left axis) ( 左軸 ) 人民銀行仲値 PBOC central ( parity 右軸 ) rate (right axis) ドル人民元実勢相場 USD/CNY exchange ( rate 右軸 ) (right axis) Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Source:Bloomberg 3

5 3. JPY/CNY exchange market (latest trends) As the concerns over trade friction between the U.S. and China were mitigated, the Japanese yen continued depreciating as a result of the sharp appreciation of U.S. interest rates. - At the beginning of the month, the concerns over the trade friction between the U.S. and China were mitigated, weakening risk-averse sentiment in the market and encouraging market participants to buy the U.S. dollar and sell the Japanese yen. As a result, the USD/JPY rose to the JPY 107 level, while the Japanese yen/chinese yuan exchange rate fell to the CNY 5.86 level. - In the middle of the month, geopolitical risks were growing regarding the situation in Syria, which led market participants to buy back the Japanese yen, and the USD/JPY temporarily fell to the upper-jpy 106 level. However, at the Boao Forum for Asia, concerns over the trade friction between the U.S. and China were mitigated due to the speech made by President of China Xi Jinping, while the media reported that President Trump was considering to return to the TPP, which led the USD/JPY to rally to the upper-jpy 107 level. The Japanese yen/chinese yuan exchange rate fluctuated at around CNY At the end of the month, the 10-year U.S. government bond yield rose to the 3% level for the first time in four years. Furthermore, expectations for the early normalization of the monetary policy of the Bank of Japan receded based on the remark made by Governor of the Bank of Japan Haruhiko Kuroda, while also, an increasing number of market participants were expecting the situation on the Korean Peninsula regarding the North Korean issues to be eased in the times ahead. As a consequence, the need to buy the Japanese yen as a means to avert risk was weakened. The USD/JPY rose sharply to JPY 109, and the Japanese yen/chinese yuan exchange rate also fell temporarily to the CNY 5.77 level. Thereafter, the Japanese yen/chinese yuan exchange rate returned to CNY Japanese yen/chinese yuan exchange rate and the U.S. dollar/japanese yen exchange rate (From April 2017) ドル USD/JPY / 円 ( 左軸 (left ) axis) 円 JPY/CNY / 人民元 ( 右軸 反転 (right axis, ) inverted) Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr Source:Bloomberg 4

6 4. Macro-economic data of China: Summary of economic indices Category Economic growth Economic trends Trade statistics (in USD) Price statistics Monetary policy Economic index GDP (year-on-year) Manufacturing PMI Trade balance Apr Exports (year-on-year) Imports (year-on-year) CPI (year-on-year) PPI (year-on-year) Money Supply Total Social Financing (TSF) Month Result Previous Comment 2018/1Q 6.80% 6.80% Apr Bio USD Bio USD Apr % -2.7% Apr % 14.4% Apr % 1.9% Apr % 3.1% Apr ,560 Bio CNY 1,330 Bio CNY 1Q growth came in stronger than expected, led by solid consumption and export related demand. Investment decelerated less than feared, despite monetary tightening. However, toward the end of the quarter, growth appeared to slow. Looking forward, rising Sino-China tensions, remain a downside risk to Chinese exports. While large enterprises saw a moderation in their PMI reading in April, business sentiment among medium and small enterprises was buoyed. Meanwhile, both the new export orders and imports indices reported a decline from March. Both exports and imports rebounded notably, confirming our view that the momentum in trade growth has remained resilient, supported by solid demand both domestically and abroad. Trade balance turned back into surplus side, alleviating concern over weakening external trade sector. Meanwhile, the escalating Sino-US trade tensions hadn t posed negative impact significantly on China trade conditions. Looking ahead, Sino-US trade tensions, softening Eurozone growth momentum and strong RMB Index could weigh on trade sector. CPI slowed more than expected. The persisting weakness in food prices has helped contain a potential rise in headline inflation and reduced the need for immediate monetary tightening. PPI accelerated on base effects. On a sequential basis, PPI fell 0.2% MoM, marking the third consecutive month of decline. While the decline was broad-based, both ferrous and non-ferrous metal mining prices saw notable. M2 growth for April rebounded mildly to 8.3%YoY as the lingering deleverage curb the outstanding credit expansion. Meanwhile, TSF and new loan growth surprised to upside. Probably the crackdown on shadow banking drove financing activities back to conventional channels. Source:Bloomberg 5

7 5. Outlook for the Chinese yuan exchange market (end of each quarter) USD/CNY 100JPY/CNY CNY/JPY EUR/CNY Key factors 2018 年 2019 年 May and June 7~9 July 月 to October 10~12 to 月 January to March 5~ 月 September December 1~ 月 April 4~6 to June 月 6.20 ~ ~ ~ ~ ~ 6.75 (6.35) (6.40) (6.45) (6.45) (6.45) 5.74 ~ ~ ~ ~ ~ 7.03 (5.93) (6.15) (6.45) (6.45) (6.58) ~ ~ ~ ~ ~ (16.9) (16.3) (15.5) (15.5) (15.2) 7.32 ~ ~ ~ ~ ~ 8.57 (7.68) (7.87) (7.87) (7.87) (7.93) Forecast by Mizuho Bank, Ltd. The figures in parentheses are forecasts for the closing rate of each quarter. The government under President Xi Jinping has strengthened the basis of its authority and has promoted reforms "with some pains." Policy measures are expected to focus on the reduction of excess investment and excess capacity, as well as on the reduction of debt to avert financial systemic risks. In the times ahead, economic growth is likely to slow down as a result of structural reforms and measures of monetary tightening. Therefore, the Chinese yuan is still forecast to gradually depreciate, although with certain stability. While the U.S. economy has been strong, the FRB has been cautious and slow in raising the interest rate. The inflation rate has remained below the FRB target rate for an extended length of time. However, the outlook for three interest rate hikes in 2018 was maintained. Market participants should remain attentive about the inflation trend, economic conditions in the U.S., and remarks by FRB officials. If there is little upward pressure, adjustment (downward) risks for the U.S. dollar would remain. Mitigated political risks in Europe and the growing upward pressure on European currencies as a result of the ECB s outlook for QE reduction could be a factor in leading the Chinese yuan to appreciate from the point of view of the currency basket. It is thus necessary to keep an eye out for the situation in the European market as well as for remarks by Chinese monetary authorities in the times ahead. 6

8 6. Trends in the Chinese yuan interest rate market While the center of interest has shifted from supporting growth to controlling asset bubbles and preventing financial crisis, the monetary policy has also shifted clearly toward monetary tightening, from moderate to neutral. Since the beginning of 2017, interests rates were raised for medium-term lending facilities (MLFs) and standing lending facilities (SLFs), as well as for reverse repo in open market operations. The intention of the Chinese monetary authorities to raise interest rates* has spread throughout the market. As a result, the effect of the monetary tightening measures became visible, as had been intended by the Chinese monetary authorities, raising the level of interest rates to a great extent. * It is also clear that the Chinese monetary authorities intend to cut bond leverage by intentionally raising the level of interest rates. The transactions of wealth management products that are not included in the balance sheet are expected to be dealt with in the same way as those of other transactions that are to be included in the balance sheet Major interest rates 14 O/N SHIBOR 1W SHIBOR 3M SHIBOR 12 CDB2Y CDB3Y Source: Bloomberg 7

9 7. Upcoming key events China U.S. 〇 Europe Date Indices and events Date Indices and events Date Country Indices and events May 2 Caixin China Manufacturing PMI May 1 ISM Manufacturing Index May 4 EU Euro area retail sales May 4 Caixin China Services PMI May 3 FOMC May 10 UK The Bank of England's Monetary Policy Committee (MPC) May 7 Foreign currency reserves Trade balance May 15 EU 1QGDP May 8 Trade statistics ISM Non-Manufacturing Index Germany ZEW Indicator of Economic Sentiment May 10 CPI May 4 Employment statistics May 16 EU HICP PPI May 9 PPI May 23 Germany Markit Germany Manufacturing PMI May 10 to 15 Money supply M2 May 10 CPI EU Markit Eurozone Manufacturing PMI May 15 Retail sales May 15 Retail sales EU Consumer Confidence Index Industrial production May 16 Industrial production May 25 Germany IFO Business Climate Index May 31 Manufacturing PMI May 23 Markit U.S. Manufacturing PMI Non-Manufacturing PMI New home sales May 31 Personal Income and Outlays Japan June 1 Employment statistics Date Indices and events ISM Manufacturing Index May 10 Trade statistics May 16 1QGDP May 18 CPI May 29 Unemployment ratio, effective opening-to-application ratio Source: Bloomberg 8

10 Global market: USD/JPY exchange market (From April 2016) Period: April 1, 2016 to April 30, 2018 USD/JPY exchange rate: JPY to June 24 There was a rapid appreciation of the Japanese yen caused by risk-averse sentiment in the market, resulting from the Brexit. April 28 The BOJ unexpectedly decided to maintain the existing monetary policy. September 21 The BOJ decided to introduce additional measures of monetary easing (yield curve control and overshooting commitment). July 29 The BOJ made a decision on additional measures of monetary easing, although the scale was smaller than the market expectations. Also, the GDP of the U.S. in the second quarter turned out to be weaker than expected. July 8 and August 5 The employment statistics of the U.S. turned out to be significantly stronger than expected. December 14 The interest rate was raised in the U.S. March 15 The interest rate was raised in the U.S. November 9 Against market expectations, Donald Trump was elected as the next U.S. President. January 20 Inauguration of U.S. President Donald Trump 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. June 14 Interest rate hike in the U.S. Announcement of the plan to reduce the balance sheet May 17 Risk-averse sentiment grew further in the market due to President Trump s problems regarding Russia. December 13 The FOMC raised the interest rate by 25 basis points. The outlook for three interest rate hikes in 2018 was maintained. September 21 The FOMC maintained its outlook for an interest rate hike before the end of the year. 95 April July October January April July October January April Source: Bloomberg 9

11 9. Global market: EUR/USD exchange market (From April 2016) Period: April 1, 2016 to April 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. 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. May 17 The U.S. dollar depreciated 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 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Source: Bloomberg 10

12 10. Summary: Outlook for major currencies (end of each quarter) USD/JPY EUR/USD EUR/JPY May 2018 and 年 June 7~9 July 月 to October 10~12 月 to January 2019 to 年 March April 4~6 to June 月 5~ 月 September December 1~3 2019月 102 ~ ~ ~ ~ ~ 105 (107) (104) (100) (100) (98) 1.18 ~ ~ ~ ~ ~ 1.27 (1.21) (1.23) (1.22) (1.22) (1.23) 127 ~ ~ ~ ~ ~ 128 (129) (128) (122) (122) (121) Forecast by Mizuho Bank, Ltd. The figures in parentheses are forecasts for the closing rate of each quarter. Key factors The appreciation of the U.S. dollar needs to be corrected. Important points The correction of the excessive appreciation of the U.S. dollar is to continue. U.S. dollar: The clearing of the appreciation of the U.S. dollar has only been partially completed. Japanese yen: The Japanese yen has still been weak from a historical point of view, compared to the purchasing power parity. Euro: The euro has been strong, thanks to the normalization of the ECB as well as the correction in the U.S. dollar exchange market. However, it did not lead interest rates to rise. 11

13 Reference (1): USD/CNY exchange market (From April 2016) Period: April 1, 2016 to April 30, 2018 USD/CNY exchange rate: CNY to 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. January 4 Following the rapid appreciation of the Chinese yuan in the offshore market, the onshore Chinese yuan appreciated against the U.S. dollar. May 24 In response to the downgrading of the rating of Chinese government bonds by Moody s, the Chinese monetary authorities controlled the depreciation of the Chinese yuan by intervening in the market by buying the Chinese yuan as well as by introducing a countercyclical adjustment factor in setting central parity rate May 18 The minutes of the FOMC meeting in the U.S. turned out to be hawkish, which fueled expectations for an interest rate hike in the U.S., leading the U.S. dollar to appreciate against the Chinese yuan. November 9 Against market expectations, Donald Trump was elected as the next U.S. President. 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. September 8 The regulations on the foreign risk reserves have been virtually abolished. In reaction to such deregulation by the monetary authorities of China, the appreciation of the Chinese yuan has started again. January 9 The Chinese monetary authorities discontinued the use of their countercyclical factors. 6.2 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Source: Bloomberg 12

14 Reference (2): JPY/CNY exchange market (From April 2016) 130 Period: April 1, 2016 to April 30, 2018 JPY/CNY exchange rate: CNY to July 29 Although the BOJ decided to introduce additional measures of monetary easing, the scale was smaller than the market expected. The second quarter GDP of the U.S. turned out to be weaker than the market expected. September 21 The BOJ decided to introduce additional measures of monetary easing (yield curve control and overshooting commitment). December 14 The interest rate was raised in the U.S. January 20 Inauguration of U.S. President Donald Trump March 15 The interest rate was raised in the U.S. USD/JPY ドル / 円 ( 左軸 (left) axis) JPY/CNY 円 / 人民元 (right ( 右軸 反転 axis, inverted) ) November 9 Against market expectations, Donald Trump was elected as the next U.S. President. June 24 The Japanese yen appreciated sharply due to risk-averse sentiment after the Brexit referendum. 95 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr Source: Bloomberg 13

15 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. 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 Japanese yen/chinese yuan exchange rate Source: Bloomberg CNY depreciation CNY appreciation CNY depreciation CNY appreciation 14

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