19th Congress of the Communist Party of China: Impact on USDCNY

China is set to take the center stage of the global economy and financial markets this week. The Communist Party of China will hold its once-every-five-year congress this week, and the new leadership group will be officially announced early next week.

As the top communist party officials convene at their congress, China will release its GDP figures for the third quarter this Thursday. Along with new economic goals, the selection of new group of party leaders is key for forming future economic policy in China including the foreign exchange market policy.

The Communist party of China congress is important in the area of economic growth targets as well as the foreign exchange currency fixing.

The economic growth target

The People’s Bank of China Governor Zhou Xiaochuan already hinted over the weekend that the growth in China is looking solid saying China’s economy is expected to grow 7.0% in the second half of 2017, up from 6.9% growth rate in the first half of this year.

The IMF also raised the forecast for China’s growth for 2017 to 6.8%.

Speaking at the spotlight of the International Monetary Fund semi-annual meeting in Washington DC, Zhou indicated that the corporate debt is a key source of risk saying “corporate debt is too high”.

Usually such comments from PBoC officials are very rare, as the Chinese central bank intends to formally announce the results of its decisions rather than to comment on current development. Expressing concerns about the corporate debt growth rate the PBoC governor Zhou probably points to monetary deleveraging.

In fact, the inflation data this morning confirmed that there is limited impact of underlying pressure on overall inflation development in China. China’s CPI rose 0.5% m,/m in September, which might look quite strong, but the year-over-year development decelerated to 1.6%.

From the growth point of view deleveraging is bad news though. High level of corporate debt and possibly poor quality of corporate debt means that the credit growth will slow down supporting the overall growth into lesser extend.

Currency fixing

Due to political events of the highest priority, markets are unlikely to see any substantial currency movement in China in upcoming weeks. In fact, what PBoC really intends to reach is the stability.

At the beginning of September there was a verbal intervention against excessive pace of CNY appreciation against the US Dollar that reversed the trend together with removal of USDCNY forward buying restrictions. Yuan consequently fell as much as 3.8% over the month. On Monday this up-trend sharply reversed again, this time  driven less by unusual fixings.

With the spot rate of yuan trading consistently below fixing set by PBoC with bias, the bank adjusted the formula for calculating its daily yuan reference rate at the beginning of June and fixed it 2% stronger in an apparent aim to ward off potential capital outflows resulting from the Fed’s impending rise in interest rates.

Given the upcoming change in the regime at the communist party congress, the trend of yuan appreciation may possibly arise.