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China Watch – PBOC’s Rate Hikes, FX Reserve Broke Below US$ 3 Trillion, Trade Surplus

PBOC’s move earlier this month to increase interest rates for its standard Open Market Operations (OMO) and Standing Lending Facility (SLF) has sparked speculations of monetary tightening. On February 3, the central bank announced to raise interest rates of 7-, 14- and 28-day reverse repos by +10bps each to 2.35%, 2.5% and 2.65% respectively. At the same, the overnight SLF rate was lifted to 3.1% from 2.75% previously. It was also reported that SLF rates for those banks that fail Macro-prudential Assessment (MPA) requirements is increased by +100 bps. The move came just 2 weeks after the rise in interest rates on medium-term lending facility (MLF). We believe the move aimed at controlling asset price bubble, given that China’s lending related to real estate has soared markedly in January. The government would likely maintain its traditional policy benchmark deposit/lending rates unchanged.

China’s FX fell -US$ 12.3B to US$2.998 trillion, the lowest since early 2011 in January 2017. According to the State Administration of Foreign Exchange (SAFE), the decline last month was mainly driven y PBOC’s FX intervention, as well as seasonal factors including high demand for foreign currencies during the week-long Lunar New Year holiday. Despite a 7th consecutive monthly fall, the size was lowest since July 2016, thanks to a stronger renminbi (USDCNY fell about -1% in January), stricter capital control measures and valuation effects. We remained concerned that renewed strength in US dollar would intensify capital outflow in China again in coming months. Indeed, it is premature to conclude the capital flow situation before releases of the following indicators, namely, FX settlement onshore and cross-border RMB flow by SAFE due February 17, PBOC’s FX position net of valuation effects in mid-February and PBOC’s reported forward position by the end Feb of this month.

The country’s trade surplus widened to US$51.4B in January, from US$40.8B a month. Exports expanded +7.9% y/y in value term, the biggest growth since March 2016 and beating consensus of +3.3%. Imports jumped +16.7% y/y, compared with a +3.1% growth in December. This also marks the fastest growth since April 2013 as commodity prices jumped over the past year. Note, however, that the Lunar New Year effect has distorted January and February figures significantly. We remain cautious and do not come to a conclusion that Chinese underlying trend of trade balance has stabilized. Yet, we do believe that the country’s exports growth is slowly returning to mid-single digit.

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