China: “Aggressive tightening” concerns overblown – RBC CM

According to the research team at RBC Capital Markets, the PBC is not aggressively tightening monetary policy and the overall system liquidity remains flush, but the PBC is slowly removing the liquidity support that it had provided following the sharp FX outflows in 2016.

Key Quotes

“This process has been under way since just after Lunar New Year (27 January – 2 February), was flagged in the 2017 Work of the Government Report, and was inevitable as financial risks intensified.”

“This corroborates our view that the PBC has shifted its policy focus to excess leverage and financial stability.”

“Decreasing marginal liquidity from the PBC and tighter regulatory measures will remain a drag on Chinese economic growth. Continued deleveraging will slow economic growth momentum further still. Combined with the huge wall of debt, the PBC will not be able to match the pace of Fed rate hikes. Narrowing rate differentials and further loosening of capital controls will continue to place downward pressure on CNY and we stick with our out-of-consensus call of 7.50 by end-2017 (cons: 7.05). YTD liquidity is flat and there is cause for concern if net liquidity turns outright negative.”