Outlook for China s Onshore Market

Transcription

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

2 1-1. US monetary policy: FOMC decides to maintain the policy interest rate while revising the statement toward monetary easing The Federal Open Market Committee (FOMC) decided to maintain its policy interest rate at %, as had been anticipated at its meeting held over January 29 and 30, On the other hand, there were remarkable revisions to the statement that turned out to be a surprise. In the statement, the words some further gradual increases in the target range for the federal funds rate were deleted, while the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate was added, implying that the next step would not necessarily be an interest rate hike. With regard to the economic outlook, the phrase risks to the economic outlook are roughly balanced was deleted, showing that FOMC members are aware of risks in the economic outlook. For the balance sheet reduction strategy, the FOMC stated that it is The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments, exhibiting flexibility while leaving the possibility of an early ending to balance sheet reduction. In response to this outcome, the probability of an interest rate hike declined based on the federal fund futures market. Even the possibility of an interest rate cut has been reflected in the market. As a result, U.S. interest rates fell, encouraging market participants to sell the U.S. dollar. At the next meeting, the FOMC is to announce its interest rate outlook. If the FOMC expects no interest rate hike before the end of the year, this will lead U.S. interest rates and the U.S. dollar to fall further. One should remain cautious about remarks to be made by Federal Reserve Bank (FRB) officials in the times ahead Interest rate outlook by the FOMC monetary policy committee (as of December) (%) +50bp (2 times) +25bp (1 time) ±0bp (0 time) Median Long-term Key points of the FOMC statement for the January 29 and 30 meeting In terms of the economic situation, the phrase risks to the economic outlook are roughly balanced was deleted. While reference to some further gradual increases in the target range for the federal funds rate was deleted, the phrase the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate was added. The possibility of the early ending of balance sheet reduction persists with the added phrase: The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. U.S. dollar index and the U.S. interest rate Probability of an interest rate hike at the FOMC in (%) % 80% Probability of an interest rate hike ドルインデックス USD index (left axis) ( 左軸 ) 米 10-year 年債利回り U.S. government ( 右軸 ) bond (right axis) % 40% 20% Probability of an interest rate cut Probability of no change 0% Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Source: Compiled based on Bloomberg data and various media reports 1

3 1-2. US postpones imposition of the additional customs duty against China On February 24, U.S. President Donald Trump announced his decision to postpone the imposition of the additional customs duty against China that had originally been scheduled for March 1 and to extend the negotiation period until the next occasion to meet President Xi Jinping. It is likely that the two countries will not have the same view on several issues, such as the treatment of industrial policy in China (including the subsidy for state-owned companies), the framework to check if the conditions in the agreement are met, and whether or not to impose a penalty if the condition is not met. However, it can be said that both countries have reasons to reach an agreement, as the Chinese economy is slowing down, while any slowdown in the U.S. economy with the depreciation of U.S. stock prices is/are undesirable for U.S. President Donald Trump before the presidential election scheduled for In the financial market, some stock prices were already rising, reflecting expectations for progress in the trade negotiations between the U.S. and China. In response to the announcement on the postponed customs duty, the Shanghai Stock Exchange Composite Index rose sharply on February 25, recording a growth of 157 points from the previous day. There are some factors of uncertainty, however, such as the competition between the U.S. and China over dominance in the high-tech industry, persistent opposition regarding security-related issues, and the possibility for the U.S. to raise the customs duty on automobiles and auto parts. However, if the U.S. and China reach an agreement, concerns regarding the global economic outlook would be mitigated, strengthening risk-taking sentiment in the market Business confidence: Continues declining in China China 中国製造業 Manufacturing PMI PMI China 中国非製造業 Non-manufacturing PMI PMI U.S. 米国 ISM 製造業 Manufacturing PMI PMI U.S. 米国 ISM 非製造業 Non-manufacturing PMI PMI Shanghai Stock Exchange Composite Index: Rising significantly as a result of the postponement of the imposition of the additional customs duty (Points) 50 The business confidence continued declining in China, and the manufacturing PMI fell below 50. Even though business confidence is above 50 in the U.S., there has been a decline since the second half of Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Source: Compiled based on various media reports and on Bloomberg data 2

4 2. 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 February 28, 2019 USD/CNY exchange rate: CNY to 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. October 1 The Chinese yuan was included in the SDR currency basket. 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 August 3 Re-introduction of the foreign currency risk reserve system 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 counter-cyclical factor 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. 6.2 Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan With progress in the trade negotiations, the Chinese yuan is to appreciate February 24 The U.S. postponed the imposition of the additional customs duty against China. 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 New government under President Donald Trump & the U.S. interest rates appreciated, leading to the appreciation of the U.S. dollar July 29 September 21 Although the BOJ decided The BOJ decided to to introduce additional Introduce additional measures of monetary measures of monetary easing, the scale was easing (yield curve smaller than the market control and overshooting expected. commitment). The second quarter GDP of the U.S. turned out to be weaker than the market expected. December 14 The interest rate was raised in the U.S. End of the boom after the establishment of the Trump administration March 15 and June 14 The interest rate was raised in the U.S. Geopolitical risks grew surrounding the situation in North Korea March 21 The interest rate was raised in the U.S. Decision on the reduction on the ECB asset purchasing program U.S. interest rate appreciation Depreciation of global stock prices July 31 The Bank of Japan introduced forward guidance, loosening the control of the yield curve. Outbreak of trade problem 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 Period: April 1, 2016 to February 28, 2019 JPY/CNY exchange rate: CNY to December 13 The interest rate was raised in the U.S. USD/JPY ドル / 円 ( 左軸 (left ) axis) June 13 The interest rate was raised in the U.S. The number of expected policy interest rate hikes in the U.S. in 2018 was revised from three to four. JPY/CNY 円 / 人民元 (right ( 右軸 反転 axis, inverted) ) Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan Source: Bloomberg

6 4-1. Outlook for the Chinese yuan exchange market USD/CNY 100JPY/CNY CNY/JPY EUR/CNY 2019 March年 2020 年 April 4~6 to 月 June July to 7~9 September 月 10~12 October 月 to January to March 月 December 1~3 2020月 6.55 ~ ~ ~ ~ ~ 6.85 (6.75) (6.73) (6.70) (6.68) (6.65) 5.85 ~ ~ ~ ~ ~ 6.99 (6.19) (6.23) (6.26) (6.36) (6.58) ~ ~ ~ ~ ~ (16.1) (16.0) (16.0) (15.7) (15.2) 7.27 ~ ~ ~ ~ ~ 8.22 (7.70) (7.74) (7.84) (7.82) (7.85) * Outlook for major currencies USD/JPY EUR/USD EUR/JPY 2019 March年 2020 April 4~6 to June 年月 July to 7~9 September October 月 10~12 to 月 January to March 月 December 1~3 2020月 108 ~ ~ ~ ~ ~ 108 (109) (108) (107) (105) (101) 1.11 ~ ~ ~ ~ ~ 1.20 (1.14) (1.15) (1.17) (1.17) (1.18) 121 ~ ~ ~ ~ ~ 126 (124) (124) (125) (123) (119) Forecast by Mizuho Bank (China), 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 Since the U.S.-China summit dialogue held on December 1 last year, expectations have been mounting for progress in trade negotiations between the U.S. and China, leading the Chinese yuan to rally. As a result, optimism spread further regarding an agreement in the market with the media reporting that conditions for the foreign exchange market would be included in the agreement at the U.S.-China ministerial-level meeting, while both heads of state made positive remarks. Furthermore, U.S. interest rates were on a decline, and the U.S. dollar was depreciating based on expectations for the normalization process of the U.S. monetary policy to slow down. Thus, the Chinese yuan appreciated against the U.S. dollar in an accelerated manner, and the U.S. dollar/chinese yuan exchange rate fell below the CNY 6.70 level for the first time in approximately 6.5 months. Outlook Since there was progress in the trade negotiations between the U.S. and China, the Chinese yuan is currently rallying rapidly against the U.S. dollar. However, market participants should maintain a wait-and-see attitude until a final agreement is made between the two heads of state, with the meeting for such an agreement having been postponed. It should, however, be mentioned that FRB Chair Jerome Powell in the U.S. has weakened his opinion for interest rate hikes, implying the possibility to end interest rate hikes and asset compression at the FOMC meeting in January, and this is already leading interest rates to fall in the U.S. Under such circumstances, it is expected that various fiscal measures, monetary policies, and strengthened regulations will have visible effects in China toward the second half of the year, and this is likely to lead the Chinese yuan to gradually strengthen against the U.S. dollar. Current situation FRB Chair Jerome Powell has taken a dovish attitude, and there are less expectations in the market for interest rate hikes before the end of the year. However, as U.S. economic indices have not fallen significantly and as the economic and political situation in Europe has been pessimistic, the U.S. dollar remains stable. Outlook Once the PMI of China fell below 50, other major countries also saw a slowdown, showing a likely peak-out of economic circulation worldwide. Under such a context, some market participants expect an interest rate cut before the end of the year. Thus, the U.S. dollar may depreciate further toward the FOMC meeting in March. Current situation While the sense of uncertainty is growing surrounding Brexit negotiations, the basic economic indices have all weakened in the eurozone, showing no sign of improvement in eurozone conditions. However, the euro is not depreciating too significantly, thanks to the pressure to sell the U.S. dollar in the overseas market. Outlook At the ECB Committee meeting held in January, Governor of the ECB Mario Draghi revised the economic outlook for the euro zone downward, showing no intention to normalize the monetary policy. While the Brexit deal remains uncertain, it remains difficult for the euro to appreciate even though the significant depreciation of the euro is also unlikely as a result of the depreciation of the U.S. dollar, along with the declining interest rates in the U.S. 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 Jan-19 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 Economic index GDP (year-on-year) Official Manufacturing PMI Trade balance Feb 2018 Exports (year-on-year) Imports (year-on-year) CPI (year-on-year) PPI (year-on-year) Month Result Previous Comment 2018/4Q 6.40% 6.50% Feb Bio USD Bio USD Feb % 9.1% Feb % -1.5% Feb % 1.7% Feb % 0.1% 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 Febades 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. China manufacturing PMI unexpectedly dropped. Worse still, the breakdown showed that New Export Order sub-index slid to its 10-year low of The PMI figures highlighted the deteriorating China trade outlook and fragile sentiment in manufacturing production despite the recent positive development of China-US trade talks. The increasing downside risks to China economy suggested that China policy makers should not mitigate the scale of government stimulus to support the economy. China s exports tumbled the most in three years in February while imports fell for a third straight month, pointing to a further slowdown in the economy despite a spate of support measures. Analysts warn that data from China in the first two months of the year should be read with caution due to business disruptions caused by the long Lunar New Year holidays, which came in mid-february in 2018 but started on Feb. 4 this year. While seasonal factors may have been at play, the shockingly weak readings from the world s largest trading nation added to worries about a global slowdown. China s factory-gate inflation in February stayed flat from a month earlier, while gains in consumer prices slipped to the lowest level in more than a year as muted price pressures point to lackluster demand in the world s second-largest economy. Signs of deflation could prompt the government to roll out more aggressive measures to halt a sharper slowdown after growth dipped to nearly 30-year lows in Monetary policy Money Supply (M2) Feb % 8.4% New bank loans in China fell sharply in February from a record the previous month, but the drop was likely due to seasonal factors, while policymakers continue to press lenders to help cash-strapped companies stay afloat. A pull-back in February s tally had been widely expected as Chinese banks tend to front-load loans at the beginning of the year to get higher-quality customers and win market share. 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 March 5 to 15 National People's Congress March 1 ISM Manufacturing Index March 5 EU Markit Eurozone Manufacturing PMI March 7 Foreign currency reserves March 5 ISM Non-Manufacturing Index Germany Markit Germany Manufacturing PMI March 8 Trade statistics March 8 Employment statistics March 5 EU Euro area retail sales March 9 CPI March 6 Trade balance March 7 EU 4Q GDP PPI March 11 Retail sales March 7 EU ECB Governing Council March 10 to 15 Money supply M2 March 12 CPI March 19 Germany ZEW Indicator of Economic Sentiment March 31 Non-Manufacturing PMI March 13 PPI March 22 EU Consumer Confidence Index Manufacturing PMI March 14 New home sales March 25 Germany IFO Business Climate Index March 15 Industrial production March 21 FOMC March 22 Markit U.S. Manufacturing PMI March 26 Consumer Confidence Index Japan March 28 4Q GDP Date Indices and events March 1 Unemployment ratio, effective opening-to-application ratio March 8 Trade statistics March 8 4Q GDP March 15 Monetary Policy Meeting of BOJ March 22 CPI Source: Bloomberg 9

11 Reference (1): Global market: USD/JPY exchange market (From April 2016) Period: April 1, 2016 to February 28, 2019 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 The interest rate was raised in the U.S. 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 The interest rate was raised in the U.S. 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. 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 13 The interest rate was raised in the U.S. 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. Jan 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 May 17 Risk-averse sentiment grew further in the market due to President Trump s problems regarding Russia. September 21 The FOMC maintained its outlook for an interest rate hike before the end of the year Source: Bloomberg 10

12 Reference (2): Global market: EUR/USD exchange market (From April 2016) Period: April 1, 2016 to February 28, 2019 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. March 29 The U.K. gave official notification of withdrawal from the EU. 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 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. April 17 German economic indices remained weak, and expectations for an interest rate hike by the ECB were lowered. October 26 The ECB Committee decided to cut asset purchasing in half. June 15 The ECB Committee announced its decision to keep a negative interest rate until summer 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. 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. Jan 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 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 China started to reform foreign 6.5 exchange control, shifting to a managed floating rate system, referring to the currency basket Japanese yen/chinese yuan exchange rate CNY depreciation CNY appreciation CNY depreciation CNY appreciation Source: Bloomberg 12

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