China’s monetary policy: let’s not repeat 2015

Sean Yokota, Head of Asia Strategy at SEB, the leading Nordic corporate bank, shares his views on China’s monetary policy and believes current and future policy adjustments will dampen the pace of CNY weakness:

“China is following the Fed and tightening monetary policy. This month the People’s Bank of China (PBoC) hiked the reverse repurchase rate by 10bps, the second hike this year. It is a bit confusing since the PBoC is not adjusting the benchmark policy lending rate, which would send a clearer signal to markets of its intent. Why is PBoC doing this? We think the adjustments are targeted to protect the currency rather than inflation pressures (although inflation pressures will gradually rise). This will limit CNY weakness for 2017.  PBoC doesn’t want to be like CSRC (stock market regulator) when it lost control in 2015 and the market crashed over 30%.

“For financial markets, current and future policy adjustments will dampen the pace of CNY weakness. We still expect CNY to weaken towards 7.05 by year end due to Fed hikes. However, it is a mild weakness of 2-3%. The flip side to keeping the currency stable is that something has to be sacrificed, which is the risk of more defaults through a higher interest rate environment. Since it is the beginning, the defaults will be concentrated in low quality bonds and companies.

“For corporates, times will remain tough. Those who are suffering from delayed payments from Chinese companies will continue to experience these due to tighter monetary policy and may see the delays being extended. Finally, the recent tightening of the capital controls (e.g. cash pooling, dividend payments) will remain to prevent outflows at least until 2018.”

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