China: PBoC remains positive on the growth outlook - Nomura

In its monetary policy report for Q1 2018, the People’s Bank of China (PBoC) remains positive on the growth outlook while more cautious on rising Sino-US trade tensions, explains the research team at Nomura.

Key Quotes

“It also called for further efforts to facilitate interest rate transmission and curb financial risk. We believe the ongoing financial deleveraging may be a multi-year theme for China, and is likely to be implemented in a more cautious manner. The transition of monetary policy framework towards a more interest rate-based one may accelerate in the coming quarters.”

“Does this change our economic views? No. We maintain our call for a prudent and neutral monetary policy stance and a gradual growth slowdown through the rest of this year.”

“Strategy implications? On rates, we believe the PBoC’s Q1 monetary policy report puts more emphasis on stabilising rather than an increasing intensity of financial leveraging. The PBoC cites data that 2017 macro leverage ratio at 250.3% is only 2.7 percentage points (pp) higher than that in 2016. The pace of increase is slower than the average increase of 10.8% during 2012-16.

Yesterday's PBoC operations – fully rolling maturing MLF and conducting new PSL – are consistent with a more macro growthsupportive framework. However, in the near term, we think money market rates such as the 7d repo fixing may move higher due to tax payment in the second half of May, and the recent wide credit spread may also have some impact on the funding of non-bank financial institutions. This may lead to a short-term rise in swap rates and we currently recommend paying 5yr NDIRS in 25% of intended size.”