China’s March data pack will start to be released on Thursday with FX reserve report, followed on Monday by inflation results and, around the same time, by monetary aggregate numbers. We expect these prints to be uniformly stronger.
In particular, we see FX reserves rising for the first time since October 2015, albeit due to valuation changes, by USD42bn to USD3,245bn. We also see M2 money supply growth accelerating to 14%YoY, matching January’s one-and-a-half-year high, and new social financing rising to a relatively solid level of CNY1,875bn, which would imply a strong double-digit YoY gain. Finally, PPI deflation, while still deep at -4.6%YoY, should be the most modest since May 2015, and CPI inflation is likely to surge 2.6%YoY, the most since November 2013.
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Our call for a rebound in FX reserves reflects a likely significant increase in valuations due to USD weakness and equity market strength globally, combined with reports that the PBoC practically stopped intervening to support the RMB last month.
Such data would be favourable for RMB FX, which has recently stabilised on the strong side of 6.50, as the currency’s strength depends critically on the size of the PBoC’s reserve asset stockpile and the central bank’s ability to add to it.
In addition, higher inflation – despite being caused almost exclusively by food prices - would limit rate cut room and thus reduce the margin by which the CNY – USD interest rate gap is likely to narrow in coming quarters, which would also be RMB-positive. We continue to expect the currency to appreciate by year end to 6.35 vs the USD.