China: Monetary policy is essentially a liquidity policy - ANZ

Raymond Yeung, Chief Economist at ANZ, suggests that a solid figure for infrastructure investment in July indicates that China’s domestic demand remains supportive.

Key Quotes

“Real estate investment growth slowed down  (July: 7.9%), suggesting that previous tightening measures have started to feed through. Even though we think the decline is in order, developers will likely stay optimistic as land sales continue to surge. Our 2017 GDP forecast of 6.7% remains a safe call.”

“Price: The rise of PPI is another encouraging sign. Steel prices continue to rise; the steel industry PMI hit a new high as the industry has already achieved 85% of the government’s annual target for capacity reduction. Deflation, China’s biggest threat, has been tamed.”

“External demand: The US investigation on China’s alleged violations of intellectual property rights under Section 301 could heighten USChina trade tensions, prompting us to adjust our China risk radar. However, our core view remains that China’s role in global supply chains is difficult to replace due to its ability to deliver in terms of quality and time-sensitiveness. This is well known among global manufacturers, including those based in the US. Despite the escalation of trade tension, the outlook for electronic exports in H2 2017 remains robust.”

“Monetary policy: We reiterate our view that China’s monetary policy is currently a liquidity policy, targeting the 7-day repo rates in the money market. The central bank’s job is to ensure financial stability which requires an appropriate level of liquidity support to the financial system. Slow M2 growth is not a concern to the PBoC as it reflects ongoing financial deleveraging.”

“Exchange rate and capital flows: USD/CNY continues to be strong in July. We have revised our yuan forecast and do not see the pair reaching 7.0 through end-2019.”

“Financial markets: Regulatory tightening will continue to set the tone for China’s financial markets. The market will watch closely any organisational and personnel changes surrounding the Party Congress in November and their implications for markets. The policy direction will continue to tighten around shadow banking activities. New policy measures may trigger some volatilities in the onshore bond market.”