Following China’s economic slowdown during the second half of the year, the PBoC appears somewhat cautious, leaning on the side of supportive monetary policy if necessary. In its 3Q'21 Monetary Policy Report the central bank noted that “China’s economic recovery and development are faced with certain phase-specific, structural, and cyclical challenges, which makes it more difficult to maintain stable economic operation.” Interestingly, the central bank removed phrases such as: strive to “not to flood the economy with liquidity”, “to control the valve on monetary policy” and utilise “normal monetary policy”; suggesting that the central bank is readying itself to support economic growth amid the broader Fed/DM monetary policy tightening rhetoric, and domestic inflationary pressures.
On inflation, the report noted that the PBoC will continue to “closely track and assess price trends”, adding that inflationary pressures are broadly under control and the central bank will continue “maintaining the overall stability of the price level”. The report “considers China a major global producer of goods, with strong economic self-sufficiency conducive to managing the impact of rising international commodity prices and overseas inflation”. It is hoped that inflation, particularly PPI, has peaked from the eye-watering 26-year high witnessed in October; as supply pressures have somewhat eased, although energy price instability is expected to remain through winter.
Following the surprise RRR cut in July, policymakers have refrained from offering further significant easing measures, and have instead focused the nation’s toolbox on the likes of providing support to SMEs, green financing, and the manufacturing sector. Clearly, the well-publicised property sector strains are evident, however, it’s hoped that President Xi Jinping’s firm policy on deleveraging the property market will help stabilise the economy; as real estate contributes to roughly a third of the country’s economic activity.
Downside risks to growth remain, particularly as policymakers are putting less emphasis on the actual growth figure, and instead looking to manage risk, increase “common prosperity”, and underpin longer-term, better-quality domestic growth. This will reduce the need for aggressive easing, and we may see liquidity injections come into play. We look to both the Politburo meeting and Communist Party’s Central Economic Work Conference in December for further policy updates.
In the meantime, our Renminbi Bond Fund continues to benefit from the interest rate differential with the US dollar; the offshore renminbi carry currently stands at around 2.5%.
Finally, we’d like to wish all those celebrating a very Happy Thanksgiving. A bit of trivia for those who didn’t know, according to my three-year-old daughter: Sarah Josepha Hale, the lady behind the poem “Mary’s Lamb”, better known now as “Mary Had a Little Lamb”, was also responsible for lobbying Abraham Lincoln to declare Thanksgiving a national holiday.