China market insights
China’s growth prospects and RMB markets are an important consideration for European and German corporates. Against the backdrop of US-China tensions, deglobalisation and evolving pandemic dynamics, China’s economic, policy and FX outlook remain key elements for corporates with business ambitions in China.
At Commerzbank’s latest client webcast, our research and business heads presented their China market insights to track the post-pandemic trajectory. Presenters included Hao Zhou, Senior Emerging Markets Economist; Tony Zhang, Country CEO China; Jack Jiang, Head of Capital Markets and Advisory Asia; and David Macmillan, Global Head Corporate Sales International.
China economic updates
Taking pulse on China’s economic momentum, the picture that emerged is one of a cyclical slowdown. Commerzbank projections show Q3 GDP growth at around 5.0 percent, and that of Q4 at sub 5 percent, with growth moderation remaining the base case in the foreseeable future. The consumption recovery trend has stagnated entering 2021, in part attributable to the COVID-zero containment strategy that continues to weigh on certain sectors and consumer segments. An illustrative example is the automobile market; while sales have encouragingly returned to 2019 levels, momentum for continued growth is absent, in line with the overall consumption trend in China.
A recurring question from clients has been what the options are for policymakers? Commerzbank sees broad-based blanket easing as unlikely. Hao Zhou, Senior Emerging Markets Economist, attributes this to two policy constraints, namely: PPI inflation, which he believes will remain elevated with moderation setting in entering next year; as well as credit growth dynamics.
On the currency front, CNY outperformed the basket of currencies in the past few quarters and is almost back to the level clocked in the December 2014 index. Dollar yield is still a key element for FX outlook and a narrowing yield differential will reduce the appreciation pressure on CNY. Commerzbank forecasts USD/CNY at about 6.6 by end of 2021 and 6.7 by end of next year.
Looking ahead, business planners will no doubt be keenly watching the G20 summit, where climate change will feature as one of the most important topics among major economies, not least for China, with implications on economic and development policies.
Shanghai five-year plan: a look into China’s policy direction
A look at Shanghai, the onshore financial hub of China, provides a glimpse into China’s roadmap to be a globally competitive international financial centre. Shanghai’s 14th five-year plan is a landmark framework that aims to establish the foundation for Shanghai to achieve the following objectives by 2025:
• to become a centre for global asset allocation, and fintech
• to grow as a hub for international green financing, and RMB cross-border transactions
• policy reforms to enhance talent pool for international finance, operating environment for international businesses
In addition, Shanghai Vice-Mayor Wu Qing announced on September 9, 2021, that the city will dedicate a strong focus on high-end manufacturing and R&D to respond to new industrial pressures such as high costs and more complicated supply chain management, with the German model being a source of inspiration. These developments are in line with other ongoing developments such as US-China decoupling, with potential benefits to German-Chinese business partnerships.
Tony Zhang, Country CEO China, highlighted that the current financial regulation has a strong focus on promoting cross-border cash pooling. “This is good news for corporate clients, who will be able to more effectively and efficiently manage onshore and offshore liquidity,” commented Tony.
Onshore and offshore RMB market
Jack Jiang, Head of Capital Markets and Advisory Asia, noted that the main theme in China FX is stability. The PBOC recently raised its foreign reserve requirement for the first time in 14 years, indicating that the policymakers’ priority is not in CNY appreciation. Jack shares that the reasons are twofold: the acceleration of Chinese holding foreign debt, and the effects on export when the currency overly appreciates. The CNY’s limited depreciation against the USD also reflects the flush of the USD.
That being said, there is still a possibility of CNY depreciating against the USD in the next couple of years due to relatively weaker fundamentals. Jack predicts that a drastic depreciation is unlikely to be on the table and a two-way market for USD/CNY is expected in the near future. Targeted liquidity injection remains the core, and there is no flooding of liquidity onshore.
Full-cycle support for your RMB needs
“One of our key differentiating factors is acting as a bridge between Asia treasury centres and European corporate headquarters,” says David Macmillan, Global Head Corporate Sales International. “For clients navigating the businesses against a backdrop of evolving cross-border regulatory movements, geopolitical risks and digitalisation trends, locally grounded advice and best-in-class execution is the key. The Bank’s capabilities in transactional, treasury and RMB business needs are what set us apart.”