China likely to meet growth target this year, depreciation pressure on yuan may extend into 2017

Yesterday, China’s third quarter economic growth data was released that showed that the economy grew 6.7 percent year-on-year. This will enable the nation to meet its growth target in the range of 6.5 percent to 7 percent this year, with the help of improving fixed asset investment. In the meantime, decelerating industrial production in September might partially be attributed to the “G-20 Blue” as was anticipated earlier, said Scotiabank in a research note. In June, Reuters had reported that China had ordered at least 225 Shanghai-based industrial facilities to totally or partially shut down for 14 days in an attempt to reduce pollution before the G20 Hangzhou summit in September.

The People’s Bank of China is expected to continue to manage onshore liquidity conditions via unconventional monetary policy tools including OMOs and the MLF, while refraining from delivering wide measures of policy easing in the coming months on hovering concerns regarding a red-hot property market and the yuan weakness.

Continued headwinds are likely to be faced by the Chinese economy in 2017, according to Scotiabank. According to the NBS spokesman Sheng Laiyun, the real estate industry added around 8 percent to the GDP growth in the initial three quarter of this year. But the cities in China have implemented additional tightening measures to ease the overheated property markets.

“We expect household mortgage loans that are a major component of household medium- to long-term loans to grow at a slower pace in the foreseeable future, while doubting the sustainability of rebounding Land Area Purchases and Floor Space Sales”, added Scotiabank.

Meanwhile, the yuan is expected to continue to face depreciation pressure until 2017; however, it is likely to ease temporarily after the December FOMC meeting. The one month and three month USD/CNH 25 delta risk reversals have retreated recently.

CFETS RMB Index might rise if the U.S. dollar strengthens widely as the central bank would intervene to avert a repetition of market panic observed in August 2015 and early January 2016. Moreover, the governing party of China would conduct the sixth plenary session of the 18th CPC Central Committee in October that might need a relatively stable yuan around the event, noted Scotiabank.

“If the dollar weakens, CFETS RMB Index will tend to decline given potential underperformance of the yuan in this scenario. At current stage, CFETS RMB Index is expected to stay above 94.0 level”, said Scotiabank.