China: Tightening, slower growth to weigh on CNY – RBC CM

Sue Trinh, Research Analyst at RBC Capital Markets, notes that CNY and CNH were bottom of the pack in February as concerns have grown about China’s subtle shift in monetary policy stance toward tentative tightening amid a renewed increase in debt, particularly shadow banking.

Key Quotes

“Shadow banking has increased 51.1%y/y (12m rolling sum basis) and its share of total social financing has risen from 24.2% to 31.9%. This statistic is all the more worrying since it does not include off-balance sheet wealth management products (WMPs), which increased by 30%y/y to USD3.8trn. In its Q4 Monetary Policy report, the PBC was notably more hawkish and abandoned its easing bias (“"stable and relatively loose”) in favour of “stable and neutral” monetary policy.”

“The policy change signals a shift in focus away from growth at all costs to financial stability risks. In particular, PBC vowed to “strictly limit” the flow of credit into speculative housing purchases and turned its attention to reining in WMPs. The unexpected round of credit stimulus last year fuelled strong Chinese demand for hard commodities and supported RMB sentiment. The declining monetary and fiscal impulse presents downside risk for Chinese GDP growth and a reversal of positive RMB sentiment seen in the last 3 months. We await China’s macro targets at the 5 March NPC.” 

“Meantime, US President Trump has yet to follow through on his pledge to label China a currency manipulator and slap 45% tariffs on imported Chinese goods. Depending on developments, in the next 1-3 months, the US Treasury Report on FX Policies of Major Trading Partners will be a key risk event.”