RMB Update: Yuan on the Rise as a Global Currency

Overview

• 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.