China Reveals Economic Plan In 2019: How It Could Impact The Yuan

China’s Economic Plan In 2019- Talking Points

  • China will implement a more proactive fiscal policy in 2019, good news for the economy and the Yuan.
  • China may launch more targeted easing to support private companies; yet it could drag down the Yuan.
  • An omission in FX policy raises concerns on whether China will defend the Yuan at a key level.

China revealed the top economic policies and targets in 2019 at the annual Central Economic Work Conference, which was held from December 19 to 21. Here are the highlights and how they could impact the Yuan:

More Proactive Fiscal Policy

The policy: China will adopt a more proactive fiscal policy in 2019. This includes larger scale of cuts in taxes and fees.

What has changed: In 2018, the fiscal deficit target was set to be 2.38 trillion yuan, with a deficit ratio of 2.6%; among all, the cuts in taxes and fees were estimated to be 1.3 trillion yuan. In 2019, the fiscal deficit ratio could be raised back to 3.0% as in 2017. The exact target will be released at the annual National People’s Congress, which is normally held in early March after the Lunar New Year.

Impact to the Yuan: China’s economic growth rate has dropped to 6.5% in the third quarter of 2018. A more proactive fiscal policy may help to add some momentum to the economy or at least slow down the drop in the economic expansion. Therefore, it is positive news to the Yuan.

Prudent Monetary Policy With A New Definition

The policy: China will maintain the prudent policy to be neither too tight nor too loose, while keep the liquidity at a reasonable and ample level. [Regulators] will work on the transmission mechanism of the monetary policy, as well as facilitate private companies and small-to-micro sized companies to get cheaper loans.

What has changed: In early 2018, the emphasis was on the control of expanding monetary supply and loans, which made the monetary policy tighter than in 2017. As financing became increasingly difficult, in specific to small-to-micro sized companies, China’s Central Bank began to cut the reserve requirement ratio (RRR). It has lowered the rate for four times in 2018. The regulator also introduced Targeted Medium-term Lending Facility in late December, a new tool that is equvalent to a targeted interest rate cut.

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