China: PBoC’s Q4 MPC meeting highlights financial stability – Nomura

Analysts at Nomura point out that in the recently-issued briefing for the People’s Bank of China’s Q4 monetary policy committee meeting, there were some changes in wording from the previous quarter.

Key Quotes

“These changes add to our conviction that financial stability remains a top priority for Chinese government and that financial deleveraging efforts will continue for years.”

“Does this change your economic view? No. We maintain our forecast for real GDP growth of 6.6% in Q4 2017 and 6.4% in 2018. We expect monetary policy to remain prudent and neutral through 2018, with one 50bp reserve requirement ratio (RRR) cut in H2 2018 after the pre-announced targeted RRR cut becomes effective in January 2018.”

“Strategy implications? On RMB, deleveraging efforts that are handled well and do not lead to financial stress would be positive for RMB over the medium term. However, near-term risks include slower growth, increased financial stress, local capital outflows and FX depreciation pressure. On rates, the ongoing focus on financial deleveraging should continue to weigh on the bond market. However, we still expect short-term liquidity to remain broadly stable and thus recommend swap steepeners.”

“The People’s Bank of China (PBoC) issued a briefing for its Q4 monetary policy committee (MPC) meeting. There were a few changes in wording from the previous quarter:

• The MPC maintained its view that the domestic economy is largely stable, although conditions are still complicated. Compared to the Q3 briefing, the MPC removed its previous judgement that “the world economy continues to undergo a profound adjustment in the aftermath of the global financial crisis”.
• The MPC called for sticking to the guidance provided in “Xi Jinping thought on socialism with Chinese characteristics for a new era”, and stressed the importance of implementing the decisions made at the 19th National Congress of Communist Party of China, the Central Economic Work Conference, the National Financial Work Conference and the government work report.
• After reiterating its desire to maintain a prudent and neutral monetary policy, the MPC highlighted the importance of “keeping control of the money supply” and “effectively curbing macro leverage” for the first time. Meanwhile, the MPC required “maintaining”, rather than “guiding”, a reasonable growth of credit and aggregate financing, which differs from the wording in the Q3 briefing.
• The MPC said it will further “improve of the twin-pillar operational framework of monetary and macroprudential policies”, and “hold the bottom line to prevent systemic financial risk”.”