Monthly Economy Report
By Andrew Smith
At February's G20 summit, which was held in Shanghai, all eyes were firmly locked on the Chinese delegation. After what has been a very turbulent couple of years for the global economy and asset prices, the world wanted to hear 'directly from the horse's mouth' what they can expect from the world's second largest economy in the months and years to come. Namely they were looking for reassurance that despite a broad slowdown in the pace of China's economic growth there would not be a catastrophic hard landing any time soon.
On the whole it seems like onlookers at the conference were satisfied with the Chinese authorities' evaluation of the current economic situation. During the summit the head of the People's Bank of China (the PBOC), Zhou Xiaochuan, gave an insightful and broadly optimistic assessment of China's future growth prospects, saying that the country will continue to see strong GDP figures relative to their G20 counterparts. Perhaps most notably he strongly reiterated that the Xi administration's bold reform agenda was still very much on track. "China will strike a balance between growth, restructuring and risk management," Mr Zhou said. "While the reform direction is clear... the pace will vary, but the reform will be set to continue and the direction is not changed". The central bank governor also addressed concerns that the PBOC will look to use currency market interventions in order to boost exports. He argued that "China has always opposed competitive currency devaluations as a way to boost export competitiveness," he said.
Not surprisingly, one of the big talking points in and around this year's G20 summit was stimulus measures. At the moment we have a very unusual situation in which central banks around the globe are looking at extreme measures such as negative interest rates to boost economic output. With the Bank of Japan and the Abe administration taking the lead on this policy approach, many are now panicking about the prospect of other major economies, including China, engaging in risky monetary policy out of desperation. One of the big players who expressed their sentiments very clearly at the G20 summit was Bank of England governor Mark Carney. He said that if other countries follow the Japanese model we could see the development of a "beggar-thy-neighbour" landscape - whereby attempts to boost a country's economy hurts other economies. Mr Carney said about a quarter of global output was coming from economies where interest rates were "literally through the floor". "It is critical that stimulus measures are structured to boost domestic demand, particularly from sectors of the economy with healthy balance sheets," he said. "There are limits to the extent to which negative rates can achieve this".
Regardless of one's stance on the merits of stimulus measures, the case for China following this path at any point in the near future is just not there. The PBOC neither has the track record nor the need to pursue such risky monetary policy measures. However, that doesn't mean we won't see more stimulus measures from either the Chinese central bank or the government. Many in the financial world have been reading into what PBOC governor Mr Zhou told the G20 and have concluded that there are more stimulus measures to come over the next few months, although what exactly they will entail is still unclear. The consensus view amongst economists at this point is that if there are more stimulus measures to come from the monetary policy side it will likely be more interest rate cuts. In a recent poll of JP Morgan analysts, the general sentiment was that China's monetary policy would remain accommodative in 2016. The firm is forecasting a rate cut, four reserve ratio cuts and a 50-basis-point reduction in the seven-day reverse repurchase rate throughout the year. The next reserve ratio cut could be announced in early March before the NPC meeting if the yuan continued to remain stable and offshore depreciation pressures fade, JP Morgan said.
The most important factor in triggering more PBOC monetary moves could be the very real treat of persistent deflation. A recent survey by the National Bureau of Statistics indicated that the producer price index, which gauges a wide range of wholesale prices, was down on the year to January by 5.3 percent. Although this is more moderate than the minus 5.9 percent annualised rate recorded in December 2015 it marks the 47th month of consecutive deflation. On the whole the current consumer price situation might not be too much of a cause for concern but it definitely increases the likelihood of rate cuts going forward.
Investors are hoping that the Chinese equity markets finally see a sustained rebound in the Year of the Monkey. So far it is looking good. In the first week of trading since the markets reopened after the Spring Festival holiday season the Shanghai Composite Index saw a very healthy 3.5% gain, marking the best weekly performance for two months and trimming a chunk off the 19% loss the index has seen since the start of the year. Likewise the battered and severely bruised commodity markets saw a slight resurgence during the same period as investors' expectations of Chinese stimulus measures translated into the large scale buying of futures contracts.
Although not everyone is expecting the bullishness to persist for much longer there are a few notable optimists who are banking on a steady but sustained asset price rebound in 2016. Wan Rong, a leading analyst at China Fortune Securities, said that "This week's rebound in the A-share markets could continue after the NPC meeting, until late March or early April, as the authority usually wants to maintain stability during the top legislative sessions, while institutional investors may also hope to take the opportunity to re-position their portfolios".
Despite the overall industrial figures remaining sluggish, which doesn't come as much of a surprise given the persistent weak external demand and the only going efforts to steer China away from its overreliance on exports, there are a few reasons to be hopeful that developments on the international stage will help the Chinese economy in 2016. For instance the possibility of a further Federal Reserve interest rate hike in the near future is looking slim. That will reduce the pressure on Chinese authorities to intervene in the currency markets and it will further incentivise them to implement stimulus measures, which would, if nothing else, give equity prices a much needed boost.
---END---
