China: Weaker RMB And Disparate Fiscal Policy

In the nearer term, China's monetary policy bodes well for markets. In the longer term, her fiscal policy does not. 

  1. Softer RMB

    Just this Thursday, 5th October, Sterling plunged by over 10% to a brief 31-year low of about $1.13/Pound. That dragged down the RMB even further; the offshore yuan skidded to a nine-month low of RMB 6.7182/$ just after Sterling's plunge, representing a drop of about 0,6% from a week earlier. I assume that the RMB would have fallen much more, had it been floating freely. This suggests that the Central Bank had to contain the RMB's softness by buying up massive amounts of its own currency. By withdrawing RMB from the system, the Central Bank, in effect, tightened its monetary policy briefly. 
  2. Stronger lending

    Meanwhile, the latest loans data we have is for August. In that month, mainland banks lent 50% more than in the previous month. Yes, you read correctly: FIFTY PER CENT more!  How much of this went into real estate is unknown at this stage. But just keep  that rocketing loans figure in your minds. By allowing lending to expand so energetically, the Central Bank loosened its monetary policy even more, lending credence to our view that China's Economic Time® remains characterized by an excess supply of money.
  3. More fiscal power to the provinces

    Curiously, the  Central Bank Governor (i.e. not the Finance Minister!) hinted at the IMF meetings last week that Beijing will consider giving greater fiscal autonomy to the provinces. Zhou Xiaochuan perceptive drew a parallel to the Euro, which, too, is characterized by one currency and many fiscal policies. Zhou's statement suggests that provincial governments will be more in charge of raising funds (taxes, bonds) as well as spending it locally.
  4. Not good fiscal news

    This splintering of the fiscal function is not good: just look at how slowly Europe has been growing. However, we must emphasize that the bulk of Europe's slowdown is because its economy has been suffocated by anti-business regulations. 
  5. Market implication

    As long as China's Economic Clock® keeps ticking on an "excess supply of money", this should remain good for her stock as well as overheated property markets. And with our optimistic view on China in the nearer term, Hong Kong's market should keep performing, too.

The above notes formed part of a RTHK radio show, you can listen to the blog  more

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