6 Mar 2014
Flash: NPC makes RMB band widening a policy objective - Nomura
FXStreet (Bali) - Zhiwei Zhang, Economist at Nomura, shares his insights on the announcement made public so far at the second annual session of the 12th National People's Congress (NPC), which started on Tuesday, March 5th.
Key Quotes
"The government announced its 2014 GDP growth target of 7.5% and its CPI inflation target at 3.5% at the second annual session of the 12th National People‟s Congress (NPC), which started today. Also, the Government Working Report sets the fiscal deficit target at RMB1.35trn, or around 2.1% of GDP, and M2 growth at around 13%. These economic targets are broadly in line with our expectations. Moreover, Premier Li vowed to balance the economy by putting more effort on promoting consumption, while considering investment as a key to stabilise the growth."
"The decision to keep the GDP growth target at 7.5% may reflect the government‟s view that potential growth is still at, or above, 7.5% – which we do not agree with. We believe that maintaining this high target may limit room for structural reforms and we expect the pace of reform to be slow. Moreover, a 7.5% growth target means that in our view the government will have to loosen monetary policy significantly at some point, most likely in Q2. Indeed, economic momentum is already fading, as suggested by weaker PMIs, while the People‟s Bank of China (PBoC) signalled a subtle loosening of its stance last week (see China: PBoC sends subtle easing message, 26 February 2014)."
"We expect monetary policy easing to pick up speed and the PBoC to then cut the reserve requirement ratio by 50bp in Q2. We maintain our forecast of 2014 GDP growth at 7.4%. We believe the government may miss its target as potential growth has fallen and there are constraints posed by issues such as financial risks and pollution. Interestingly, Li Wei, head of the official State Council think-tank, had an article published today in which he forecast GDP growth at “slightly higher than 7% in 2014” – a more cautious tone than the NPC Government Working Report shows."
"Premier Li Keqiang said explicitly in the working plan that the government will widen the trading band of the RMB exchange rate. This is a new development as it was not mentioned in the working plan last year. This suggests to us that the government will put a greater policy priority on a band widening than last year, reinforcing our FX strategist‟s view that the band widening may happen soon."
"The working plan also touched on many other structural reforms, but these messages were in line with those given at the third plenum of the CCP Congress last November. As such, they offer little surprise."
Key Quotes
"The government announced its 2014 GDP growth target of 7.5% and its CPI inflation target at 3.5% at the second annual session of the 12th National People‟s Congress (NPC), which started today. Also, the Government Working Report sets the fiscal deficit target at RMB1.35trn, or around 2.1% of GDP, and M2 growth at around 13%. These economic targets are broadly in line with our expectations. Moreover, Premier Li vowed to balance the economy by putting more effort on promoting consumption, while considering investment as a key to stabilise the growth."
"The decision to keep the GDP growth target at 7.5% may reflect the government‟s view that potential growth is still at, or above, 7.5% – which we do not agree with. We believe that maintaining this high target may limit room for structural reforms and we expect the pace of reform to be slow. Moreover, a 7.5% growth target means that in our view the government will have to loosen monetary policy significantly at some point, most likely in Q2. Indeed, economic momentum is already fading, as suggested by weaker PMIs, while the People‟s Bank of China (PBoC) signalled a subtle loosening of its stance last week (see China: PBoC sends subtle easing message, 26 February 2014)."
"We expect monetary policy easing to pick up speed and the PBoC to then cut the reserve requirement ratio by 50bp in Q2. We maintain our forecast of 2014 GDP growth at 7.4%. We believe the government may miss its target as potential growth has fallen and there are constraints posed by issues such as financial risks and pollution. Interestingly, Li Wei, head of the official State Council think-tank, had an article published today in which he forecast GDP growth at “slightly higher than 7% in 2014” – a more cautious tone than the NPC Government Working Report shows."
"Premier Li Keqiang said explicitly in the working plan that the government will widen the trading band of the RMB exchange rate. This is a new development as it was not mentioned in the working plan last year. This suggests to us that the government will put a greater policy priority on a band widening than last year, reinforcing our FX strategist‟s view that the band widening may happen soon."
"The working plan also touched on many other structural reforms, but these messages were in line with those given at the third plenum of the CCP Congress last November. As such, they offer little surprise."