Michael Every, Head of Financial Markets Research at Rabobank, notes that the China’s National People’s Congress (NPC) met from March 5-6 to launch the country’s 13th 5-Year Plan which was a platform to show the thrust of future policy direction, and on that front there were a lot of positives that catch the eye.
• A shift towards lower growth via a move from a y-o-y GDP growth target of close to 7.0% in 2015 to a range target of 6.5% to 7.0%, granting a bit more flexibility for policy makers;
• The admission that it needs systematic reform by shifting away from investment towards consumption;
• Welcome recognition of overcapacity and “zombie” State-Owned Enterprises (SOEs), with promises to deal with these issues “proactively yet prudently by using measures such as mergers, reorganizations, debt restructuring, and bankruptcy liquidations.”;
• Pledges to press ahead with other supply-side measures such as corporate tax cuts and further liberalizing interest rates. The former will be welcomed by businesses, and the latter is critical to the financial system to eventually allocate capital using market-based mechanisms; and
• A commitment to keep CNY/CNH generally stable at a “reasonable and balanced level” (which was very much expected after the G-20 statement to the same effect) and to also continue with capital account liberalization while controlling “abnormal flow of cross-border capital effectively”. Both of those promises will be a huge relief to the financial markets after the huge volatility prompted by the weakening of CNY/CNH on several occasions in the past 12 months.
In short, there are plenty of positive headlines about structural reforms in the latest 5-Year Plan. However, these are arguably more than counter-balanced by the clearer priority given to a political 6.5% y-o-y growth target that will be very hard to achieve without slipping back into bad economic habits.
Overall, there are deeply conflicting policy messages behind the vision of where China wants to be in 2020. The government wants deleveraging; and yet loose fiscal and monetary policy; restructuring; and yet no rise in unemployment; a shift to consumption; and yet more details on investment; a huge economic transition towards market mechanisms; and yet to retain overall control; greater internationalization of CNH; and yet currency stability. These are all incompatible goals. Even China cannot have its cake and eat it.
As the market digests those dichotomies CNY will soon start to weaken again; if/when China slips back into pump-priming to boost growth to ever lesser effect, CNY will weaken more; and if the 6.5% growth target cannot be met by any other means, further officially-sanctioned devaluation looks inevitable. Any way you slice it, CNY still looks likely to fall going forwards.”
(Market News Provided by FXstreet)
