China – Lockdowns, Growth, Policy Options

China’s credit aggregates surprised to the upside in March – does it mean that the policy stance is getting more accommodative?

China Growth Headwinds

China’s pandemic situation took a turn for the worse lately, creating additional headlines for the near-term growth outlook. The consensus growth forecast for 2022 had been cut to 5%, and the sell-side comments suggest that further downgrades are likely. Unlike most emerging markets (EM) peers, China does have room for additional policy support to prop up growth. China’s real policy rate is high (in part due to low inflation), and the government under-utilized the 2021 budget. Authorities, however, have so far been reluctant to go “all in” – but do the latest money and credit aggregates signal that the situation is changing? 

China Fiscal Frontloading

China’s total social financing and the new yuan loans beat expectations in March. And the upside surprise was mostly due to a big jump in government bond issuance and short-term corporate lending. It is encouraging that long- and medium-term corporate lending also shows signs of life (on a sequential basis). The consensus believes that fiscal “frontloading” will be followed by additional moves on the monetary policy side – such as a 10bps “blanket” cut in the 1-year medium-term lending facility rate later this week. We also keep an eye on regulations, especially in the real estate sector, which accounts for a big chunk of China’s GDP and is crucial for consumer confidence.

China Exchange Rate Outlook

A related policy question has to deal with the exchange rate. The Chinese renminbi has been remarkably stable in the past few months, while its regional peers continued to weaken against the U.S. dollar. However, it looks like some renminbi drivers – such as capital inflows and interest rate differentials – might be turning against it. In particular, diverging policies – easing in China and tightening elsewhere, especially in the U.S. – lead to rapidly shrinking interest rate differentials (see chart below), which suggest that a currency correction might be overdue. Are we finally going to see more “two-way” FX trading in China? Stay tuned!

Chart at a Glance: China-U.S. Interest Rate Differentials Are Collapsing

Source: VanEck Research; Bloomberg LP