China is faced with several policy challenges, such as economic rebalancing, growth stabilisation and containing financial risks. Amongst these, growth stabilization is likely to be the main priority in 2016. During the last week’s NPC meeting, official targets were made for growth to expand 6.5%-7% in 2016, helped by a recovery in credit growth and fiscal stimulus with a move in the deficit target to 3% in 2016 from 2015’s 2.3% and an additional 0.5% of GDP in special local government bond issuance. In February, total social financing decelerated sharply to a monthly net gain of ¥780bn; however, this comes after a surge of ¥3.4tn in January.

The official target is being tracked by credit growth. In order to stabilize the currency, stabilization in China’s growth is instrumental. Stability in currency is important for curbing capital outflows and FX reserve drawdowns. Analysing the source of capital outflows implies that corporate balance sheet adjustments in external debt have mainly driven capital outflows since mid-2014. However, in recent times, capital outflow from the consumer sector has increased rapidly, which is mainly due to the increase in yuan’s depreciation after August 2015.

Hence, the February’s moderate decline in FX reserves by $29bn is encouraging and compares to around $100bn declines in the earlier two months. Even if the slowdown is partially due to fewer trading days during the Lunar New Year along with increased capital controls, it also suggests stabilization of the CNY and improved communication of the central bank.

The recent stabilization also suggests further monetary easing. The PBoC is expected to cut RRR three more times in 2016. Also, the central bank is likely to lower policy rate by 25bp in next quarter, along with 50bp cut in the 7-day repo rate in 2016.