China: Policy issues persist - HSBC

Against the backdrop of a more broad-based growth recovery, policy makers have turned to focus on risk management in 2017, according to analysts at HSBC.

Key Quotes

“Since early in the year, the average market-driven 7-day repo rate has risen by close to 50bps, under tighter liquidity conditions. Several regulators have also issued a series of administrative guidelines aimed at curbing off-balance sheet lending and shortening the financing chain. At the five-yearly National Finance Work Conference, held in July, a committee was established to co-ordinate financial policies, strengthen accountability and implement functional (and conduct-based) regulations. The PBoC’s role in risk prevention and macro-prudential regulations was also strengthened. With the baton passing to the regulatory side, we see the PBoC maintaining a relatively neutral monetary policy stance in the near term. The combination of stronger growth and benign inflation should give the central bank plenty of room to support the growth recovery.”

“Meanwhile, thanks to the growth recovery, the fiscal position has turned around in a very meaningful way. Fiscal revenues were up 10.2% y-o-y in the year to August, while expenditure grew by 13.4% yo-y (versus 6.4% and 12.9%, respectively, over the same period last year). This has helped to offset the impact of higher funding cost and tighter restrictions around local governments’ bond issuances. In the first eight months of the year, infrastructure investment grew 15.8% y-o-y (down slightly from 18.3% y-o-y in 2016). We expect fiscal policy to remain supportive in the rest of the year.” 

“Risks

• Persistent softness in the USD and China’s stronger-than-expected growth recovery driven by private sector businesses has led to over 6% appreciation in the RMB versus the USD so far this year. The RMB’s valuation versus a basket of currency also strengthened by nearly 2% in August alone. Such rapid pace of currency appreciation, if sustained for the next few months, will pose some risks to the growth recovery, particularly the export-sensitive sectors. 
• In addition, we will also monitor how the housing market moderation plays out. Our base case has factored in a modest moderation this time due to lower inventory levels and divergent local policies. But a bigger slowdown will put more deflationary pressures on the economy.”