China: Proximate threat is the PBOC’s exchange rate policy - ING

Tim Condon, Chief Economist at ING, expects the Chinese February economic data to sustain the current risk-on rally as they believe the proximate threat is PBOC exchange rate policy but based on Governor Zhou’s recent comments they consider the threat low. 

Key Quotes

“The February money and credit data made clear that the January credit blowout was not the beginning of another credit boom. Aggregate financing increased by CNY780bn (1.1% of GDP), down from January’s record CNY3.4tr. Almost the entire increase came from bank lending; shadow bank credit (entrusted and trust loans and banker’s acceptances) contracted by CNY263bn and capital market fund raising (corporate bonds and non-financial corporate equity issuance) increased by CNY168bn. 

There was CNY502bn of new corporate medium- and long-term loans, down from the record CNY1.06tr in January, and CNY182bn of new medium- and long-term household loans, down from January’s record CNY478bn. MLT housing loans are a proxy for mortgage loans and we assume the big decline was related to Lunar New Year seasonality. 

The large year-to-date increase in mortgage loans was consistent with the 30.4% increase in home sales in January-February. Housing starts grew 9.7%, the first increase since mid-2014, which proved a one-off as the contraction in starts resumed in the second half of the year and continued through 2015. 

Stronger housing starts were associated with stronger real estate fixed asset investment growth (3.0% in January-February vs. -1.8% in December). The acceleration in infrastructure investment growth (to 15.8% from 10.6%) also was encouraging. Even manufacturing investment growth accelerated (to 7.5% from 4.4%). Stronger manufacturing investment growth is at odds with slower industrial production growth (to 5.4% from 5.9%); we consider the industrial production data the more reliable signal about the state of manufacturing.

The release of the January money and credit data in mid-February triggered the current risk-on rally, in our view, and we expect the February economic data will sustain it. We believe the proximate threat is the PBOC’s exchange rate policy and we take heart from Governor’s Zhou’s statement to the press that “we will not join the rank of competitive depreciation” and will manage the exchange rate “with reference to” a basket of currencies.”