China Annoucned Fiscal and Monetary Policy for 2016 At the Key Economic Meeting
- China’s fiscal policy in 2016 will be more pro-active with additional tax cuts and government spending.
- Monetary policy will remain flexible, hinting at further interest rate cuts; yuan formation regime will continue to improve.
- Yuan-denominated assets at its largest offshore market, Hong Kong, hit 960 billion by the end of October.
(Chinese government’s official news agency)
- China hosted the Central Economic Work Conference, the top meeting to determine the strategy for the next year during December 18 to 21. According to the statement released after the meeting, in 2016, the macroeconomic policy shall be stable, providing an appropriate condition for structural reforms. The fiscal policy should be more forceful with tax reduction and temporarily increase in the deficit ratio. The monetary policy should be more flexible, to help cut the cost for financing, maintain sufficient liquidity and improve the exchange rate formation regime.
More specifically, the government will have five targets in 2016:
A) deal with the overcapacity issue;
B) help business cut costs;
C) reduce property inventory and stabilize the housing market;
D) improve the efficiency in supply; and
E) prevent financial risks.
There are a few important signals for traders and investors to be taken from this statement. In terms of fiscal policy, we may expect additional tax cuts for both individual and businesses. For example, changes in income tax and real estate tax have already been up for discussion: China’s Government Plans Major Changes in Policy. Also, China is increasing government spending following the “One-Belt-One-Road” initiative. It is to export excess production through infrastructure programs in neighbor countries. Thus, we expect to see more deals in 2016 like this one China Daily News Update for November, 19 2015.
In terms of monetary policy, in order to help business reduce financing cost, the central bank is likely to cut interest rates again next year after six cuts over the past ~12 months. If this takes place, more capital is expected to flow out of China to the other side of Pacific where interest rates have already begun to rise and are expected to continue to do so next year. Thus, China’s foreign reserves will continue to decline. At the same time, as mentioned in the statement, the regulator is going to spend more efforts to promote the yuan’s formation regime. The central bank has de-pegged yuan to dollar and let it refer to a broader basket of currencies - China’s Central Bank Prepares Yuan for Fed Hike, Dollar De-Peg. Also, the Chinese government is signing bilateral deals with other countries to promote the cross-border use of the currency and providing more yuan-denominated products such as by allowing foreign government insurance yuan bonds - Yuan Enters Retracement Phase, Eye on Domestic Policies.
In summary, the targets and strategies set at the key economic meeting are consistent with China’s current situation of slowing growth, which we discussed at length in the article, People’s Bank of China Lowers GDP Forecast, Signs New Currency Deals. The year of 2016 will be “a year of no significance”, while it will also be the foundation for the development of China for the next 5 to 10 years.
(Chinese leading online media of financial news)
- According to a report released by Hong Kong Monetary Authority (HKMA), by the end of October, the total amount of yuan assets at the offshore Hong Kong market hit 960 billion including bank deposits and certificates. Hong Kong holds the first place among all the offshore yuan centers. Taiwan ranks the second, with a total amount of 317.9 billion yuan assets. Singapore is the third, with a total amount of 225.0 billion yuan.
The HKMA expects that mainland China’s financial market will continue to open up, which will promote the development of yuan at the offshore markets such as at Hong Kong.
The Hong Kong yuan market is one of the first yuan offshore markets, which can be dated back to as early as in 2003. Looking at the development of yuan in the Hong Kong market can give us a picture of how the yuan could possibly become an international currency around-the-world.
There are three stages of yuan’s development at Hong Kong: From November 2003 to July 2007, it was the individual Yuan business that expanded the fastest. Yuan deposit, exchange, wire transfer and credit card services were introduced at Hong Kong local banks at that time. From July 2007 to June 2010, financial institutions from the mainland China started to issue Hong Kong yuan bonds. At the same time, the cross-border use of yuan in trade settlement was initiated for tests. From June 2010 to now, it was the expansion in yuan’s settlement in trade and investment.
In late October, a 5-million-yuan bond was issued at the London market, another major step for the currency to enter the global stage. With the experience gained from the Hong Kong market, we can tell that the development of Yuan at the London offshore market is in stage two. And we may expect more yuan settlement in trade and investment in this market in the very near future.
Written by Renee Mu, DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.