China: economic slowdown ahead of the Congress of the Communist Party - BBH

Analysts from Brown Brother Harriman, explained that economic data from China have been softer than expected for the second straight month ahead of the important Communist Party conference next month. They remain “sanguine” about the yuan’s outlook.  

Key Quotes: 

“The 19th National Congress of the Communist Party of China starts October 18.  It is held every five years and sets the tone for the ensuing years until the next one is held.  The growth target was 6.5% for the current five-year period.  The target that’s set for the next period will be a very important signal as to whether policymakers can tolerate a slowdown while structural reforms are enacted.”

“President Xi and Premier Li are widely expected to remain in power for their second (and final) terms.”

“The economy has picked up in recent quarters, due in part to a pick-up in new loan activity this year.  GDP growth is forecast by the IMF to remain steady at 6.7% in 2017 before decelerating modestly to 6.4% in 2018 and 6.2% in 2019.  GDP rose 6.9% y/y in both Q1 and Q2, up from 6.8% in Q4 2016 and 6.7% in Q3 2016.  However, data so far (trade, retail sales, IP) suggest Q3 will see a slowdown.”

“Price pressures bear watching, with CPI accelerating to 1.8% y/y in August from 1.4% in July.  This is the highest rate since January, and accelerating PPI (6.3% y/y in August) suggests further upside for CPI.  The inflation target for 2017 is 3%.”

“For now, we believe the PBOC will remain on hold.  It has not moved official rates since the last 25 bp cut back in October 2015.  However, the central bank has snugged some market rates higher this past year.  Looking ahead, we believe the PBOC will maintain a tightening bias in light of rising inflation.”

“Whilst campaigning ahead of the election, President Trump threatened to cite China as a currency manipulator “on day one.”  China has not been cited yet, nor will it likely be cited in the next report due in Q4.  Before this week’s bounce, USD/CNY had traded to its lowest level since December 2015 last week.  While we do not believe the bilateral exchange rate is a very comprehensive measure, recent yuan gains would seem to take some of the heat off China.”

“Just as the pair notched a cycle low of 6.4390, the PBOC announced that it was loosening up restrictions on trading forwards.  While we do not think that the PBOC is targeting or protecting any particular level for the exchange rate, the move signals discomfort with what had become an increasingly one-way market.  Note that near CNY6.4355, the dollar had retraced 62% of its rally against the yuan from the October 2014 low near CNY6.1083.”