Outlook for China s Onshore Market

Transcription

1 Outlook for China s Onshore Market January 19th, 2018 Mizuho Bank (China), Ltd. Treasury Department Copyright (c) Mizuho Bank, Ltd. All Rights Reserved.

2 1-1. Topics (1): Central Economic Work Conference closes, maintaining the moderate and neutral monetary policy The Chinese authorities held the Central Economic Work Conference on December to discuss economic policy for A three-year plan was introduced for the purpose of resolving monetary risks, environmental pollution, and poverty. It was also suggested that the proactive fiscal policy and the moderate and neutral monetary policy would be maintained. Furthermore, eight key issues are listed for the next year in order to focus on the quality of economic growth. The statement did not repeat the statement regarding the thorough leverage reduction that was used in the past two years, but mentioned monetary risks more often. Moreover, the statement mentioned a cautious and neutral monetary policy again, which shows that the Chinese policy authorities will avoid an excessive slowdown in economic growth while controlling industries related to credit growth and environmental pollution. Key issues in 2018 Management principles in monetary and fiscal policies Major economic goals in 2018 To prevent major risks (mainly monetary risks) To take effective measures against poverty To prevent environmental pollution 2016 Monetary: To make the moderate monetary policy even more flexible Fiscal: To strengthen the proactive fiscal policy Eight important issues emphasized at the conference 1. To further advance supply-side reforms 2. To support the development of each market participant (through stateowned company reforms, etc.) 3. To develop and execute a strategic plan for the restoration of agricultural villages 4. To narrow regional gaps 5. To promote an open market 6. To take measures to secure and improve the living standards of the population 7. To promote stable and healthy development in the real estate market 8. To strengthen environmental regulations and focus on the protection and restoration of the ecosystems (Translated by MHBK [China] based on the original statement) Monetary: To keep it moderate and neutral Fiscal: To make it more proactive for greater efficiency Monetary: To keep the moderate monetary policy neutral Fiscal: To keep it proactive Source: Compiled by MHBK (China) based on data from Bloomberg and Asset Management One 1

3 1-2. Topics (2): U.S. monetary policy: Interest rate raised for the third time in 2017, while keeping the outlook for three hikes in 2018 At the Federal Open Market Committee (FOMC) meeting held on December 13, the policy interest rate was raised from 1.25% to 1.50%, as had been anticipated, while keeping the outlook for three interest rate hikes in It should also be mentioned that the projection for the interest rate at the end of 2020 is above 3%, and this is the first time that the projection exceeded the neutral interest rate at 2.75%, which was originally seen as the target after the interest rate hikes. In the FOMC statement, the GDP outlook was revised upward, perhaps reflecting the recent, strong economic indices as well as the expectation for the approval of the tax reform. However, the inflation outlook was kept at below 2%. A member of the Federal Reserve Board of Governors (FRB), Jerome Powell, has been scheduled to become the new FRB chair at the beginning of February 2018, and market participants expect that the existing monetary policy would be maintained. In the times ahead, however, it is important to keep an eye out for future FRB policy under the new structure, as well as remarks by important officials Median Possibilities of maintaining the current interest rate or raising the interest rate at the next FOMC meeting in March 100% 80% 60% 40% 20% (%) Interest rate outlook by FOMC members (as of Dec. 2017) Dec Outlook by each committee member Median Possibility for the FF interest rate to be maintained at the existing level after the FOMC meeting scheduled for March 21 Possibility for the FF interest rate to be raised by 25 basis points after the FOMC meeting scheduled for March 21 3/21FOMC 後の FF 金利誘導目標 現状維持 の確率 3/21FOMC 後の FF 金利誘導目標 25bp 利上げ 確率 0% Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Key points of the FOMC statement for the December meeting (%) Information received after the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2% Short-term interest rate and the U.S. dollar index FF interest rate, upper limit (left axis) FF interest rate, lower limit (left axis) Two-year U.S. government bond (left axis) USD index (right axis) 0.0 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan

4 2. USD/CNY exchange market (latest trends) Even though the FRB raised the interest rate, as had been anticipated, pressure to sell the U.S. dollar strengthened, leading the Chinese yuan to appreciate toward the end of the year. At the beginning of December, the U.S. dollar was steady against other major currencies. However, its impact on the Chinese yuan market was generally limited, and the U.S. dollar/chinese yuan trading exchange rate remained within a narrow range between the CNY 6.61 and CNY 6.62 level. While the situation was advancing toward the approval of the tax reform bill in the U.S, the FOMC raised the interest rate in the U.S. on December 13. However, this had already been reflected in the market, and pressure to sell the U.S. dollar strengthened thereafter, also leading the Chinese yuan to appreciate against the U.S. dollar. At the Central Economic Work Conference in China, which wrapped up on December 20, a cautious and neutral monetary policy was once again underlined with an optimistic view for the economy. As a result, expectation mounted for the appreciation of the Chinese yuan. At the same time, the appreciation of the U.S. dollar was adjusted toward the end of the year while there were few market activities, which accelerated the advancement of the appreciation of the Chinese yuan. In the end, 2017 ended with the U.S. dollar/chinese yuan exchange rate at CNY with a yuan stronger by approximately 6.3% year-on-year. 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 ( 右軸 ) PBOC central parity rate (right axis) ドル人民元実勢相場 USD/CNY exchange ( rate 右軸 ) (right axis) April May June July August September October November December

5 3. JPY/CNY exchange market (latest trends) Following the appreciation of the Chinese yuan in the second half of the month, the Japanese yen continued depreciating against the Chinese yuan. At the beginning of December, the November employment statistics of the U.S. were released and the results were below the market estimate. However, thanks to the approval of the interim budget bill at the U.S. Congress as well as the media report that U.S. President Donald Trump was scheduled to announce a plan to invest in infrastructure, the U.S. dollar appreciated against the Japanese yen to the upper-jpy 113 level. Following this trend, the Japanese yen also depreciated against the Chinese yuan to the CNY 5.82 level. In the middle of the month, the FOMC raised the interest rate, as had been anticipated. However, as the outlook for three interest rate hikes in 2018 was maintained, the U.S. dollar/japanese yen exchange rate fell to the lower-jpy 112 level. Thereafter, in reaction to the headline that the Senate and the House of Representatives agreed on the tax reform bill in the U.S., the U.S. dollar/japanese yen exchange rate rallied to the upper-jpy 113 level. The Japanese yen/chinese yuan exchange rate, which had been fluctuating at the CNY 5.89 level in the middle of the month, also started falling again in response to this news. At the end of the month, market participants sold the U.S. dollar against other major currencies, following which the Chinese yuan appreciated significantly toward the end of the year. As a result, the Japanese yen also depreciated against the Chinese yuan, and the Japanese yen/chinese yuan exchange rate reached the CNY 5.76 level the lowest rate in the year. Japanese yen/chinese yuan exchange rate and the U.S. 119 dollar/japanese yen exchange rate (From April 2017) USD/JPY ドル / 円 ( 左軸 (left) axis) 117 JPY/CNY 円 / 人民元 (right ( 右軸 反転 axis, inverted) ) April May June July August September 2017 October November December 4

6 4. 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 Dec Exports (year-on-year) Imports (year-on-year) Month Result Previous Comment 2017/4Q 6.80% 6.80% Dec bllion USD bllion USD Dec % 12.3% Dec % 17.7% With 6.9% annual growth for 2017 GDP, which was in line with Premier Li s previous comment, currently China only needs to maintain averagely 6.27% annual growth in the rest of coming 3 years to achieve double 2010 GDP in All in all, Chinese leader has been downplaying the GDP growth target. China s manufacturing PMI fell in December due to the slowing growth in activity in electricity and iron production. In terms of size of enterprise, the slowdown in PMI was mainly led by small enterprises, as they are more easily subject to shutdowns amid pollution controls. While December exports came in much as expected, December import growth disappointed the market with a broad-based slowdown. Slower import growth due to curtailed demand for raw materials since stricterthan-expected pollution control measures and continued tightening of both monetary policy and local government investment. Exports of electronic and hi-tech products remained strong amid robust global recovery, which should further support China s industrial growth in Price statistics Monetary policy CPI (year-on-year) PPI (year-on-year) Money Supply M2 (year-on-year) Dec % 1.7% Dec % 5.8% Dec % 9.1% CPI picked up in December on higher food prices. While the rise in fresh vegetable and fruit prices has been helped by the cold weather, the gradual increase in pork prices is likely to persist. Although the YoY increase in PPI eased in December on base effects, the sequential increase in raw materials prices persisted amid the heightened antipollution campaign. China credit data for December surprised to downside. Broad M2 money supply in 2017 grew 8.2 percent from a year earlier, missing forecasts for an expansion of 9.1 percent and hitting the slowest pace since records began in The M2 growth rate was far lower than the official target of around 12 percent. 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 Jan to Mar. 年 Apr. 4~6 to Jun. 月 Jul. 7~9 to Sep. 月 Oct. 10~12 to Dec. 月 Jan to 年 Mar ~3 月 1~ 月 6.25 ~ ~ ~ ~ ~ 6.90 (6.50) (6.55) (6.65) (6.65) (6.65) 5.48 ~ ~ ~ ~ ~ 6.90 (5.91) (6.06) (6.21) (6.33) (6.39) ~ ~ ~ ~ ~ (16.9) (16.5) (16.1) (15.8) (15.6) 7.38 ~ ~ ~ ~ ~ 8.69 (7.87) (7.93) (8.05) (8.05) (8.05) 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. 14 O/N SHIBOR 1W SHIBOR 3M SHIBOR 12 CDB2Y CDB3Y 10 8 Major interest rates

9 7. Upcoming key events China U.S. 〇 Europe Date Indices and events Date Indices and events Date Country Indices and events Jan. 7 Foreign currency reserves Jan. 5 Employment statistics Jan. 2 Germany Markit Germany Manufacturing PMI Jan. 10 CPI Jan. 12 CPI EU Markit Eurozone Manufacturing PMI PPI Retail sales Jan. 8 EU Euro area retail sales Jan. 12 Trade statistics Jan. 17 Industrial production Jan. 17 EU HICP Preliminary figures Jan Money supply M2 Jan. 24 Markit U.S. Manufacturing PMI Jan. 23 Germany ZEW Industrial production Jan. 25 New home sales EU ECB Governing Council Jan. 25 Jan. 18 Retail sales Jan. 26 4Q GDP Germany IFO Business Climate Index 4Q GDP Feb. 1 FOMC Jan. 31 Manufacturing PMI Non-Manufacturing PMI Feb. 1 Caixin China Manufacturing PMI Feb. 5 Caixin China Services PMI Japan Date Jan. 26 Jan. 30 Indices and events CPI Unemployment ratio, effective opening-to-application ratio 8

10 8. Global market: USD/JPY exchange market (over the past year) Period: Apr. 1, 2016 to Dec. 29, 2017 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. 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. 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. March 15 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 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. 95 April July October January April July October 2016 November 9 Against market expectations, Donald Trump was elected as the next U.S. President. 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. 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

11 9. Global market: EUR/USD exchange market (over the past year) 1.19 Period: Apr. 1, 2016 to Dec. 29, 2017 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. 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 April July October January April July October

12 10. Summary: Outlook for major currencies (end of each quarter) USD/JPY EUR/USD EUR/JPY Jan to 年 Mar. Apr. 4~6 to 月 Jun. Jul. 7~9 to Sep. 月 Oct. 10~12 to Dec. 月 Jan to Mar. 年 1~ 月 1~3 2019月 108 ~ ~ ~ ~ ~ 110 (110) (108) (107) (105) (104) 1.17 ~ ~ ~ ~ ~ 1.23 (1.18) (1.18) (1.18) (1.19) (1.19) 128 ~ ~ ~ ~ ~ 128 (130) (127) (126) (125) (124) 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 (over the past year) Period: Apr. 1, 2016 to Dec. 29, 2017 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. 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. 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. 6.5 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. 6.4 April July October January April July October 2016 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

14 Reference (2): JPY/CNY exchange market (over the past year) Period: Apr. 1, 2016 to Dec. 29, 2017 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. November 9 Against market expectations, Donald Trump was elected as the next U.S. President. 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. ドル USD/JPY / 円 ( 左軸 (left ) axis) 円 JPY/CNY / 人民元 ((right 右軸 反転 axis, ) inverted) June 24 The Japanese September 21 yen appreciated 100 The BOJ decided to introduce additional sharply due to measures of monetary easing (yield risk-averse curve control and overshooting sentiment after commitment). the Brexit 95 referendum. April July October January April July October

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 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 exchange control, shifting to a 6.5 managed floating rate system, referring to the currency basket Japanese yen/chinese yuan exchange rate CNY depreciation CNY appreciation CNY depreciation CNY appreciation 14

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