Chinese Monetary Policy Being Pursued By Different Means
CNY continues to rise and SOE profits increase
Chinese monetary policy is being pursued by rather different means, with the focus on reducing domestic leverage now reinforced by a tougher approach towards outwards capital flows, according to Deutsche Bank Wealth Management. The bank notes that there are concerns that too much of this is being financed through debt, and that capital outflows are making it more difficult to manage domestic levels of liquidity.
Foreign reserves and the Chinese currency remain closely linked to the issue of capital flows. China continues to make efforts to attract capital inflows—for example by making it easier to invest in certain sectors, giving selective tax breaks to foreign investors and reducing rules about the repatriation of foreign profits—but it is also trying to reduce capital outflows, putting outward foreign direct investment (FDI) into three categories: encouraged, restricted and banned.
Tuan Huynh, Chief Investment Officer and Head of Wealth Discretionary for APAC, at Deutsche Bank Wealth Management, said, “Chinese overseas direct investment already exceeds foreign direct investment (FDI) into China and there are worries that a declining value of inwards FDI could have a very broad impact, not only on immediate levels of economic activity, but also on the import of technology necessary to upgrade China’s industrial base.”
He added, “The desire to limit outwards foreign investment stems from rather different reasons: there are concerns that too much of this is being financed through debt and that capital outflows are making it more difficult to manage domestic levels of liquidity. Falling outwards investment this year does seem to have given the People’s Bank of China (PBoC) slightly more leeway to pursue its monetary policy objectives so far this year, engineering both a rise in reserves and a strengthening currency.”
CNY and foreign reserves continue to rise
China’s currency has continued to rise against the USD, with the central bank raising the official midpoint guidance rate for the ninth successive trading session on Thursday. The CNY has now appreciated by 6.5% against the USD this year, while foreign reserves have also risen recently, gaining USD11 billion in August to reach USD3.09 trillion, the seventh consecutive month they have increased.
SOE profits increase
Meanwhile, profits of industrial state-owned enterprises (SOEs) have been increasing this year, rather against trend. Profits were up 42% YoY in the first seven months of 2017, having risen only 3% in full-year 2016 and fallen by 21% in 2015.
Huynh noted, “The official government line is that this is due to continuing reforms, with some excess capacity having already been reduced. However, the real question is whether the rise in profits is a cyclical trend (resulting from higher demand and higher commodity prices) or whether structural problems remain. Pessimists worry that rising profits will reduce incentives for the government to push on with reform, while optimists expect a further push after the leadership transition at the Chinese Communist Party Congress next month.”