RMB Bi-weekly - Yuan on the rise as a global currency
Jiazi Guo |
March 09, 2018
- Growth, inflation and deficit targets will be announced at the upcoming National People’s Conference (NPC).
- It is expected that the trade surplus will rebound, however tensions over US-China trade can create downside risk
- February PMIs decreased across the board with reduced activity due to the Lunar New Year; particularly manufacturing PMI
- The anticipated change of guard at the People’s Bank of China is unlikely to affect the country’s monetary policy direction; Governor will be appointed and a top economic advisor Lie Hu is the frontrunner
- CPI inflation likely rebounded whereas PPI inflation eased
- Expect China to maintain GDP growth target of 6.5% in 2018
- Chinese RMB still lags far behind the USD and Euro when it comes to international payments
2018 Q1 RMB Updates
- China’s foreign exchange regulator announced the country has no short positions in foreign currencies versus the Yuan, unchanged from December.
- China started reporting about their holdings since early last year after speculation that the central bank was utilizing currency swaps and derivatives to intervene in foreign exchange markers to bolster the Yuan.
- The Yuan strengthened 3.5% to the USD in January, marking its best performance since 1994.
- A stronger Yuan and prudent policy measures curbed capital outflows in January. The outflows of $2.6B USD were the lowest in 45 months. The 3.5% CNY appreciation against the USD in January is in line with China’s focus to let the markets determine the exchange rate, and tolerate more volatility.
- China focused on promoting the use of the Yuan as a global currency but it is still far behind US and Europe in the use of its currency for international payments.
- A key driver of slow adoption in the international payments market is China’s government’s strong controls over its financial system, in particular, regulation to curb the flow of its currency overseas for real estate and other purchases.
- Uncertainty about capital controls and regulations to persist this year which further limits the usage of the Yuan internationally.
- On the bright side, there are early signs that international institutions are starting to accept the Yuan as a major currency. For example MSCI is saying yes to the addition of mainland shares into the emerging market index, along with programs to allow international investors to invest in mainland assets.
- It is clear China wants to internationalize the RMB to increase domestic economy attractiveness for foreign investors and bolster its political ambitions. Under the leadership of its current central banker China has instituted reforms aimed at expanding the Yuan’s global reach.
- There is a big opportunity for China to set the RMB as the default currency for planned infrastructure projects in the coming years.
2018 Q1 Country Updates
- The Premier will deliver this year’s government work report at the upcoming NPC meeting. It includes economics targets such as growth, inflation, unemployment, deficit and other key performance indicators. Key metrics to watch are growth and deficit.
- The government has typically set conservative growth targets to ensure they are met. The 2017 targets were met.
- Expect China to keep the GDP growth target at around 6.5% for 2018 (same as in 2017).
- Expect fiscal policy to remain proactive in 2018, without additional economic stimulus. There is reluctance to raise the deficit to more than 3% of GDP.
- China’s manufacturing PMI declined in February, likely due to weakening activity during the Lunar New Year week-long holidays. The PMI showed weaker demand and slowing production during the holiday period, with lower factory price pressure. However, given that the PMI is already adjusted for seasonality it is likely that other factors may have played a role which is a sign of lower growth in the coming months.
- The country’s foreign exchange reserves rose every month in the prior year, every consecutive month, to $3.16 trillion in January. However, they likely dropped compared to the previous month after adjusting for the exchange rate with CNY becoming stronger. The central bank kept FX intervention light in January, as the CNY started the year strong not only against the USD but also on a basket basis.
- China’s current account surplus likely to remain below 2% of GDP in 2018.
- With Trump’s latest tariff announcements, a form of a trade war can make China’s trade surplus a less reliable anchor for capital inflows as compared to previous years.
Four topics to watch at the NPC meeting
- China’s annual meetings are kicking off this weekend. Of particular interest is the NPC.
- This year’s meetings are very important as NPC will elect new leaders and officials for the coming five years, including the central bank’s governor, and 2018 economic targets will be announced.
- The new central bank governor is in the spotlight this year. The current Governor Zhou Xiaochuan was appointed for his third term in 2013, the longest ever as the norm is to serve two terms.
- Speculation is that top economic advisor Liu He is the frontrunner for the role this year, after having spoken at the Davos Conference, representing China. Topics to pay attention to during the NPC meetings include: (1) constitutional amendments such as removing term limits for the President and Vice President; (2) vote on the National Supervision Law which would grant investigative powers to the new commission; (3) personnel changes as part of the government leadership shuffle every 5 years; (4) announcement of 2018 economic targets; (5) approval of 2018 budget; and (6) details on plan to introduce a property tax in the country.
Source: Reuters, Bloomberg
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.
Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.
About the Author
Jiazi is part of SVB's Global Financial group where she help clients in various business segments from corporations, venture capital, private equity and hedge funds. She specializes in FX sales, trading and structuring.
Jiazi has lived in China and the US. In her free time, she enjoys travel and music.
Now Let's Get Started
See how Silicon Valley Bank makes next happen now for entrepreneurs like you.
Connect With Us