Outlook for China s Onshore Market

Transcription

1 Outlook for China s Onshore Market January, 2019 Mizuho Bank (China), Ltd. Treasury Department Copyright (c) Mizuho Bank, Ltd. All Rights Reserved.

2 1-1. Slowed growth in imports and exports with persistent frictions between the U.S. and China The trade statistics for December 2018 revealed that both imports and exports slowed significantly in terms of the year-on-year figures, falling far below the estimated levels. The sharp decline in exports was seen in a wide range of sectors, indicating that the last-minute demand before the introduction of the additional customs duty is diminishing, while external demand is also decreasing. Furthermore, despite the fact that the customs duty for imports was cut in November, the growth in imports is slowing, suggesting a downturn in domestic demand in China. In particular, imports from the U.S. have declined dramatically. While the figures were low in all sectors, imports declined significantly, and this expanded the trade surplus as a result. On December 1, dialogue between the U.S. and China was held during a summit meeting, and the trade frictions between the two countries saw a temporary ceasefire for 90 days. However, the CFO of Huawei Technologies Co., Ltd., Meng Whanzou, was arrested, which fueled concerns over the frictions between the U.S. and China once again. Furthermore, the U.S. prohibited the use of Huawei products within all governmental agencies for security reasons, while three Japanese mobile phone companies also decided to exclude the products of major Chinese companies from being used as communications equipment, suggesting a slowdown in the Chinese economy, Imports, exports, and the trade balance (Year-on-year percentages) -30 輸入の伸び ( 左軸 ) Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 (Year-on-year percentages) Trade with the U.S. Trade 対米貿易収支 balance with ( 右軸 the U.S. ) (right axis) Exports 対米輸出 to the ( 左軸 U.S. )(left axis) Imports from the U.S. (left axis) -30 対米輸入 ( 左軸 ) Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 (USD, billions) 貿易黒字 Trade surplus ( 右軸 ) (right axis) 輸出の伸び Growth in ( 左軸 exports ) (left axis) Growth in imports (left axis) (USD, billions) U.S. dollar/chinese yuan exchange rate ドルインデックス U.S. dollar index ((left 左軸 axis) ) ドル人民元 U.S. dollar/chinese ( 右軸 ) yuan exchange rate (right axis) After the dialogue held between the U.S. and China during a summit meeting on December 1, the Chinese yuan appreciated against the U.S. dollar and the exchange rate reached the level observed in the first half of September. However, concerns over the frictions between the U.S. and China grew once again, leading the Chinese yuan to again depreciate against the U.S. dollar to the CNY 6.90 level. 93 Aug-18 Sep-18 Oct-18 Nov-18 Dec Source: Compiled based on data released by Bloomberg and various media reports

3 1-2. Central Economic Work Conference: Further tax cuts made while maintaining a high liquidity level, in order to support the economy The Central Economic Work Conference wrapped up on December 21, As a fiscal measure, it was decided that taxes and administrative expenditures will be cut significantly in 2019, in order to support stable economic growth. Furthermore, the allocation for the special bonds issued by local governments will also be raised relatively significantly, while new measures were introduced to mitigate the difficulty for small companies and private enterprises to procure funds. In terms of monetary policy, it was confirmed that the liquidity level would be kept at a reasonable and sufficient level. At the Central Political Bureau Conference held in July, the expression moderate and neutral as indicated at the previous Central Economic Work Conference had already been replaced by the expression moderate. The monetary policy in 2019 is thus expected to follow the same line. In terms of the current economic climate, it was pointed out that the external environment has been complicated, while downward risks for the Chinese economy have been growing. As key measures to be promoted in 2019, seven principles were discussed. As can be seen in the macro economic policy in which the anti-cyclical policy (i.e., the policy for pushing back on the declining economy) is vigorously being promoted, the Communist Party and the government seem to have their focus on economic measures. Comparison with the statements released in 2017 Seven focus measures to be promoted in 2019 Fiscal policy Monetary policy Foreign exchange policy Real estate market Fiscal policy to be strengthened by significantly cutting taxes and expenditures - Scale of the special bonds issued by local governments to be expanded - Anti-cyclical policy to be promoted - Moderate monetary policy to be maintained - Balance between easing and tightening to be appropriate, with a reasonable and sufficient liquidity level to be maintained - Not mentioned this time - Basic principle that a house is to live in and not to invest in and that a long-term development mechanism for the real estate market is to be established - Optimal fiscal policy to be maintained in order to support the focus areas - Moderate and neutral monetary policy to be carried out - Chinese yuan exchange rate to be maintained at an appropriate level - Housing supply to be increased in order to revitalize the long-term real estate rental market High-quality development of the manufacturing industry Formation of a strong, large domestic market Steady promotion of strategies for the development of agricultural villages Balanced development in various regions in the country Acceleration of economic reforms Promotion of market liberalization toward all partners Reinforcement of the social security system and the improvement of the people s quality of life Source: Compiled based on various media reports 2

4 USD/CNY exchange market (From April 2016) Capital outflow increased after the China Shock, leading the Chinese yuan to depreciate Period: April 1, 2016 to December 31, 2018 USD/CNY exchange rate: CNY to October 1 The Chinese yuan was included in the SDR currency basket. June 24 Risk-averse sentiment grew in the market as a result of the Brexit referendum. 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. September 8 The regulations on the foreign risk reserves have been virtually abolished. Control over the depreciation of the Chinese yuan through tightened regulation by the Chinese authorities 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 countercyclical factor. June 15 U.S. announced an additional customs duty worth USD 50 billion against China. Deregulation thanks to the robust Chinese yuan market June 24 The deposit reserve requirement ratio was cut. August 24 Re-introduction of the counter-cyclical factor August 3 Re-introduction of the foreign currency risk reserve system 6.2 Apr Jul. Oct. Jan. Apr Jul. Oct. Jan. Apr Jul. Oct. Yuan depreciation due to the trade issues between the U.S. and China December 1 In the dialogue held between the U.S. and China during a summit meeting, it was agreed that the introduction of the customs duty against China in 2019 would be postponed by 90 days. 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 Although the BOJ September 21 decided to introduce The BOJ additional measures of monetary easing, the decided to scale was introduce smaller than the additional market expected. measures of The second quarter monetary GDP of the U.S. easing (yield turned out to be curve control weaker than the market expected. and 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 ドル USD/JPY / 円 ( 左軸 (left) axis) 円 JPY/CNY / 人民元 (right ( 右軸 反転 axis, inverted) ) June 13 The number of expected policy interest rate hikes in the U.S. in 2018 was revised from three to four. Period: April 1, 2016 to December 31, 2018 JPY/CNY exchange rate: CNY to Apr. Jul Oct. Jan. Apr Jul. Oct. Jan. Apr Jul. Oct Source: Bloomberg

6 4-1. Outlook for the Chinese yuan exchange market USD/CNY 100JPY/CNY CNY/JPY EUR/CNY January 2019 to March 年 April to June July to October to January 2020 年 to March 4~6 月 7~9 月 10~12 月 1~3 2019月 September December 1~ 月 6.65 ~ ~ ~ ~ ~ 6.95 (6.90) (6.85) (6.85) (6.80) (6.80) 5.94 ~ ~ ~ ~ ~ 6.95 (6.33) (6.40) (6.52) (6.60) (6.73) ~ ~ ~ ~ ~ (15.8) (15.6) (15.3) (15.1) (14.9) 7.45 ~ ~ ~ ~ ~ 8.41 (7.94) (7.95) (8.01) (7.96) (8.02) * Outlook for major currencies USD/JPY EUR/USD EUR/JPY January 2019 to March 年 April to June July to October to January 2020 to 年 March ~6 月 September 7~9 月 10~12 December 月 ~3 月 1~3 月 105 ~ ~ ~ ~ ~ 108 (109) (107) (105) (103) (101) 1.12 ~ ~ ~ ~ ~ 1.21 (1.15) (1.16) (1.17) (1.17) (1.18) 123 ~ ~ ~ ~ ~ 126 (125) (124) (123) (121) (119) 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 Current situation As a result of the promotion of deleveraging led by the Chinese monetary authorities, it became more difficult for private companies to procure funds, ending up in an increase in corporate bond defaults, which led stock prices to fall. In addition, the trade frictions between the U.S. and China intensified, which had not been expected by China, and the sense of uncertainty grew regarding the Chinese economy. As a consequence, the Chinese yuan depreciated. Furthermore, the euro also depreciated as a result of political concerns in Europe, such as the budget plan in Italy as well as the Brexitrelated issues in the U.K., which both contributed to the depreciation of the Chinese yuan against the U.S. dollar. Regarding the customs duties against China, on December 1, the U.S.-China summit meeting was held and an additional sanction scheduled for January next year was avoided with a grace period of 90 days. Thereafter, the Chinese yuan started to rally. Outlook The trade frictions between the U.S. and China persist, and the outcome of the negotiations between these two countries, to be concluded at the end of February, remains unforeseen. However, as Federal Reserve Board (FRB) Chair Jerome Powell continues signaling his intention not to continue to increase interest rates, such hikes are gradually approaching their end. Furthermore, various fiscal and monetary measures and regulations are likely to start seeing some effects in China. Thus, the downward pressure on the Chinese yuan is expected to gradually weaken, and the Chinese yuan is forecast to start appreciating slowly toward the second half of the year. Current situation Market participants expect prices to rise in the times ahead based on the strong U.S. economy as well as on the appreciation of the crude oil price, leading to policy interest rate hikes and concerns over an increase in U.S. bond issuance. As a result, the U.S. interest rates appreciated and the U.S. dollar index remained high in the second half of the year. U.S. dollar Outlook The U.S. dollar remains strong thanks to the gradual interest rate hikes by the FRB as well as the depreciation of the euro and the currencies of emerging countries. However, the economic environment seems to have peaked out globally, fueling concerns over capital outflow from emerging countries. In the times ahead, the FOMC may shift to a more-neutral monetary policy, as both domestic and international economic environments will not easily justify interest rate hikes. Thus, the U.S. dollar is forecast to start depreciating gradually. Euro Current situation The basic economic indices in the euro zone are all weakening, while various political concerns persist, such as the problem between Italy and the European Commission regarding the budget plan for the coming fiscal year as well as the media report on the resignation of the German Prime Minister from her post as her political party s leader and the difficulty in the negotiations regarding the U.K s withdrawal from the EU. As a result, the euro is expected to depreciate. 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 caused by falling U.S. interest rates. 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 Oct-18 Source: Bloomberg 7

9 6. 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) Official Manufacturing PMI Trade balance Dec 2018 Exports (year-on-year) Imports (year-on-year) CPI (year-on-year) PPI (year-on-year) Money Supply (M2) Month Result Previous Comment 2018/4Q 6.40% 6.50% Dec Bio USD Bio USD Dec % 5.4% Dec % 3.0% Dec % 2.2% Dec % 2.7% Dec % 8.0% China s economy cooled in the fourth quarter grew at the slowest pace since the global financial crisis, under pressure from faltering domestic demand and bruising U.S. tariffs, dragging 2018 growth to the lowest level in nearly three decades and pressuring Beijing to roll out more stimulus to avert a sharper slowdown. With support measures expected to take some time to kick in, most analysts believe conditions are likely to get worse before they get better, and see a further slowing to 6.3 percent this year. Activity in China s manufacturing sector contracted in December for the first time in more than two years in a fresh blow to the economy, highlighting the challenges facing Beijing as it seeks to reduce the risk of a sharper economic slowdown in The increasing strain on factories signals a continued loss of momentum, adding to worries about softening global growth, especially if the Sino-U.S. dispute drags on. China s exports unexpectedly fell the most in two years in December, while imports also contracted, pointing to further weakness in the world s second-largest economy in 2019 and deteriorating global demand. Adding to policymakers worries, data also showed China posted its biggest trade surplus with the United States on record in 2018, which could prompt President Donald Trump to turn up the heat on Beijing in their bitter trade dispute. Net exports had already been a drag on China s economic growth in the first three quarters of last year, after giving it a boost in China s producer prices rose at their slowest pace in more than two years, a worrying sign of deflationary risks that could see Beijing roll out more policy support to help stabilize the economy. Consumer inflation for the month also eased from a year earlier due to lower non-food prices, short of market forecasts and well below Beijing s target. The sharper-than-expected pullback in prices raises the possibility of more stimulus measures even though PBOC just reduced the RRR in January. Broad M2 money supply missed forecasts for a slight pick-up and hovering just above November s record low. While new loans ended 2018 on a slightly more upbeat note, several other key credit gauges suggest overall credit conditions in China remain stubbornly tight despite the recent shift to policy easing. Analysts say it will take at least a few quarters for the latest measures to turn that trend around. 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 January 7 Foreign currency reserves January 3 ISM Manufacturing Index January 2 EU Markit Eurozone Manufacturing PMI January 10 CPI January 4 Employment statistics Germany Markit Germany Manufacturing PMI PPI January 7 ISM Non-Manufacturing Index January 7 EU Euro area retail sales January 10 to 15 Money supply M2 January 8 Trade balance January 8 EU Consumer Confidence Index January 14 Trade statistics January 11 CPI January 22 Germany ZEW Indicator of Economic Sentiment January 21 January 31 Retail sales January 15 PPI January 24 EU ECB Governing Council Industrial production January 16 Retail sales January 25 Germany IFO Business Climate Index Manufacturing PMI January 18 Industrial production Non-Manufacturing PMI January 24 Markit U.S. Manufacturing PMI January 25 New home sales January 29 Consumer Confidence Index January 30 FOMC January 31 Personal Income and Outlays Japan Date Indices and events January 11 Trade statistics January 18 CPI January 23 BOJ Monetary Policy Meeting February 1 Unemployment ratio, effective opening-to-application ratio Source: Bloomberg 9

11 Reference (1): Global market: USD/JPY exchange market (From April 2016) Period: April 1, 2016 to December 31, 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. March 15 November 9 Against market expectations, Donald Trump was elected as the next U.S. President. 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. 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. 95 Apr. Jul Oct. Jan. Apr Jul. Oct. Jan. Apr Jul. Oct. Source: Bloomberg 10

12 Reference (2): Global market: EUR/USD exchange market (From April 2016) Period: April 1, 2016 to December 31, 2018 EUR/USD exchange rate: USD to October 4 The media reported that the ECB slowed down asset purchase (tapering). The report was denied thereafter. November 9 Against market expectations, Donald Trump was elected as the next U.S. President. 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. 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 December 8 Decision to extend the bond purchasing program 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 June 24 Pressure to sell the euro strengthened, due to the Brexit. July 8 and August 5 The employment statistics of the U.S. turned out to be significantly stronger than expected. May 17 The U.S. dollar depreciated due to President Trump s problems regarding Russia. 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. Oct 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. Japanese yen/chinese yuan 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 CNY depreciation CNY appreciation Source: Bloomberg 12

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