China: PBoC Q3 monetary policy report insights - Nomura

FXStreet (Delhi) – Research Team at Nomura, notes down the key highlights of People's Bank of China (PBoC) Q3 monetary policy report:

Key Quotes

“The Q3 report shows some difference from the Q2 report in its assessment of the global economic situation, suggesting the PBoC is more concerned with the global growth. Faced with the sluggish global economy, the PBoC is more likely to keep monetary policy accommodative, in our view.”

“The report indicates that the PBoC is willing to adopt a relatively loose monetary policy stance to support growth and economic structural change but is unlikely to ease policy aggressively. These statements suggest to us that the PBoC will keep monetary policy accommodative but the pace of easing may be slower than in the past three quarters.”

“The Q3 report also revealed that the actual loan rate declined in Q3 but the magnitude of the fall was smaller than benchmark rate cuts (50bp in total) and real interest rate remained at a relatively high level.”

“The Q3 report discusses real interest rates and the debt problem in the form of a box. Comparing the three inflation indicators (i.e. CPI, PPI, GDP deflator), the report suggests that it is more appropriate to use CPI or the GDP deflator to calculate real interest rate as PPI is affected more by imported external factors. This implies that the real interest rate is not particularly high in the opinion of the PBoC.”

“The Q3 report also gives five reasons why it considers there is no foundation for persistent depreciation of the RMB. First, China’s growth is still relatively fast, providing a good macroeconomic environment for a stable RMB exchange rate. Second, China maintains a current account surplus in the long run, which is the main fundamental factor in shaping the supply-demand situation in the foreign exchange market. Third, with the faster internationalisation of RMB and financial market opening in recent years, foreign investors have increased their demand for RMB for trade and asset allocation, which provides new support for the RMB. Fourth, the market has been digesting the prospects of the Fed rate hike and should therefore become more rational after the hike. Lastly, China has sufficient foreign exchange reserves, a strong fiscal condition and a sound financial system, which supports a stable RMB.”

“Overall, with non-financial sector growth momentum likely stabilising, we expect no benchmark rate or bank reserve requirement ratio (RRR)/interest rate cut in Q4 while we maintain our call of four RRR cuts and two benchmark rate cuts in 2016 as headwinds remain strong. That said, we cannot exclude the possibility of front-loading some of next year’s easing measures to this year should the economy resume its downward trend earlier than we expected.”
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