20160127-法国巴黎银行-Currency_risk_is_constraining_monetary_easing_14页_422kb

Currency Risk is Constraining Monetary Easing

Core Content

This report discusses the Chinese government's approach to managing currency risk and its implications on monetary policy and the banking sector in 2016. It emphasizes the prioritization of currency stability over aggressive monetary easing and outlines the expected measures to control RMB depreciation, the impact of currency fluctuations on banks and the economy, and the broader implications of supply-side reforms.

Main Points

1. Currency Policy as a Priority

• RMB/USD Depreciation Strategy: The government is expected to adopt a "stepped" depreciation approach rather than a sharp decline. RMB7/USD may be reached by the end of 2016, but the depreciation will be managed to avoid exceeding a 10% drop from current levels (RMB7.3/USD).
• Policy Tools: The PBOC is using a combination of stable liquidity, higher forex volatility, short-term capital controls, and expectation management to stabilize the RMB.
• Forex Reserves: The central bank is cautious about using forex reserves due to limited availability. It aims to keep reserves above USD2.2t to prevent a sharp depreciation.
• Capital Controls: New measures have been introduced to monitor and control FX activities, including restrictions on individuals and banks to limit capital outflows.

2. Constraints on Monetary Easing

• Currency Stability Limitations: With currency stability as a top priority, further monetary easing (e.g., RRR cuts, rate cuts) is limited to avoid intensifying depreciation pressure.
• Liquidity Management: The PBOC has used various tools like MLF, SLF, and OMO to provide liquidity, which has had a greater impact than a 50bp RRR cut.
• Economic Weakness: The real issue is low investment yield and appetite, not weak money supply. Monetary easing may not effectively address this.

3. Supply-Side Reforms and Downside Risk Protection

• Capacity Reduction: The government aims to cut 6% of overcapacity sectors in 2016, with initial focus on coal, steel, cement, and glass in northern China.
• Economic Impact: Supply-side reforms may cause short-term economic pain, including increased NPLs, job losses, and reduced local government fiscal revenue.
• NPLs and Earnings Impact: The closure of unprofitable companies is expected to increase NPLs by RMB120b (+9.2% y-y) and raise the NPL ratio by 0.11% in 2016, leading to an 8.59% negative impact on banking sector earnings.
• Downside Risk Mitigation: Measures include accelerating NPL disposals, setting up an unemployment insurance fund, and implementing active fiscal policies.

Key Information

4. Impact of RMB Depreciation on Banks

• Net Foreign Assets Exposure: Most banks have positive net foreign assets exposure, meaning depreciation could boost profits. Only four banks (ABC, CEB, INDB, and PAB) have net forex liabilities.
• Earnings Sensitivity: A 10% RMB depreciation is expected to have a limited impact on bank earnings. For example, PAB would see a 9.08% decline in earnings, while the banking sector as a whole would see an average 0.24% increase.
• Corporate Debt Exposure: Corporates with high USD debt and importers may face profit erosion and debt repayment challenges. The property sector, in particular, is vulnerable due to its high USD debt burden.

5. Factors Influencing Positivity on the Chinese Economy

• Positive Catalysts: Delayed US rate hikes, a recovery in the Chinese economy driven by active fiscal spending, and strong export data in Jan/Feb could ease RMB depreciation pressure.
• Economic Fundamentals: China's current account surplus, large forex reserves, and stable financial system make it relatively resilient to external shocks.

6. Future Outlook

• Monetary Policy: The PBOC will likely maintain a neutral stance, avoiding further easing due to currency constraints and the need for stability.
• Exchange Rate: The RMB may depreciate gradually, with the possibility of reaching RMB7/USD by year-end.
• Supply-Side Reforms: These reforms are expected to continue, but with careful management to avoid systemic risks and support economic recovery.

Conclusion

The Chinese government is managing currency risk as a top priority, balancing depreciation with liquidity control and capital controls. While RMB depreciation could have some impact on banks, especially those with net forex liabilities, the overall effect is expected to be limited. Supply-side reforms are likely to continue, but with measures in place to protect against downside risks. The report highlights the importance of expectation management and the potential for positive economic developments if certain catalysts materialize.