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People's Bank of China Lowers GDP Forecast, Signs New Currency Deals

People's Bank of China Lowers GDP Forecast, Signs New Currency Deals

Renee Mu, Currency Analyst

This daily digest will focus on new developments in China’s foreign exchange policy, changes in financial market regulations, and broader economic coverage in order to keep the DailyFX reader up-to-date on news typically covered only in Chinese-language sources.

- PBOC forecasts thatChina will grow at a lower rate of 6.8% in 2016.

- China is admitted to EBRD, making it another step under One-Belt-One-Road strategy.

-The government signed bilateral deals with two more countries to promote the use of yuan.

PBOC News

(China’s Central Bank)

- PBOC published the 2016 China’s Macroeconomic Outlook report on December 16. It said in its report that real GDP growth is expected to be 6.9% in 2015 and real growth for 2016 will be 6.8%. The researchers also forecast that the CPI inflation in 2015 is 1.5 and will rise to 1.7% in 2016. The ratio of current account surplus to GDP in 2016 is said to be 2.8% in 2016 and imports will grow at 2.3% the same year. It is predicted that the real estate sector is likely to stabilize in the second half of 2016; yet the recovery is going to be slow.

China’s central bank describes a picture for China’s economy in the next year: growth will remain relatively slow. Recovery may be seen but will be in the later of the year and at a low speed. It is like a person who has been running at full speed for so long that he still need more time to get his breath back. Thus, the year of 2016 will be another year for China to make adjustments. We won’t expect to see major breakouts; instead, most will be quantitative accumulations before they could lead to the next qualitative change.

- European Bank for Reconstruction and Development (EBRD) approved China’s membership. China joining the EBRD is one of the steps that follow the One-Belt-One-Road initiative. It will help Chinese companies and financial institutions to work together with the EBRD on projects in Central and Eastern European, Southern and Eastern Mediterranean and Central Asian countries.

One-Belt-One-Road (OBOR) refers to the old routes that China used to connect to Europe in the ancient times. In the new century, China introduces this initiative for a similar purpose, to promote trade and establish a network through infrastructure projects with neighbor countries. It will not only help China to export excess industrial productions but also promote the cross-border use of yuan in the OBOR regions. The membership at EBRD gives China more access to involve in the projects at the target countries.

- PBOC and the central bank of United Arab Emirates extended the bilateral currency swap agreement for another three years. The amount of the swap agreement remained the same at 35 billion yuan/20 billion UAE Dirham. In addition, the two countries signed a RQFII agreement, which issues a 50 billion quota to the UAE companies to invest in China.

The extension of bilateral currency swap agreement and signing the new RQFII deal shows that China is gradually promote yuan’s international role. On one hand, the government encourages the yuan’s use in other countries. On the other hand, China steadily opens up its domestic capital markets to allow foreign investors participate through channels such as RQFII and QFII programs. More about RQFII and QFII, read Can a Trader Take Advantage of the IMF’s Chinese Yuan Decision

- China signed a bilateral agreement with Kyrgyz Republic to promote the bilateral currency settlement and cooperation in energy projects.

Kyrgyz Republic is one of the 64 countries covered in the China’s OBOR initiative. It is a small developing country, categorized into lower middle income by the World Bank. A country like this normally doesn’t have much voice on the global stage, but for China, it is a great opportunity to increase cross-border cooperation. As mentioned above, China now faces overcapacity problem and has both internal incentive and external pressure to promote the yuan’s international role. Countries like Kyrgyz Republic which lacks of investment in infrastructure are perfect matches for China to export the excess production. During the process of the infrastructure projects, China is able to introduce the yuan payment system at such countries as well. If yuan becomes widely used in all the 64 countries, then China will have at least completed one third of the task on yuan’s globalization.

Written by Renee Mu, DailyFX Research Team

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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