CNY: The state helps state banks – Commerzbank

It was announced over the weekend that the Chinese government plans to inject fresh capital into its major state-owned banks. Four major banks (Bank of Communications, Bank of China, Postal Savings Bank of China and China Construction Bank) will receive a total of RMB 500 billion in capital injections from the Ministry of Finance. This is not entirely new news: RMB 500 billion in new government bonds had already been earmarked for this purpose in the government's budget, Commerzbank's FX analyst Volkmar Baur notes.

CNY is likely to remain under pressure

"The capital injection should enable banks to lend more, which could continue to provide some cyclical tailwind to the economy. Sentiment in the Chinese economy has brightened somewhat since the announcement of some support measures last September, as shown by this morning's PMIs. The overall rate of improvement has continued. The balance of payments data published on Friday afternoon are also encouraging."

"The government is spending RMB 500 billion to increase its stake in state-owned banks and, according to Bloomberg, is willing to pay a premium of between 8.8% and 21.5% on Friday's share prices for these shares. This effectively subsidizes the banking sector to lend to the industrial sector in particular. It further strengthens the supply side in China, while private demand remains under-supported (especially structurally)."

"The CNY is likely to remain under pressure, as the weak structural development suggests a persistently low interest rate environment, and thus the interest rate differential with the US, but also with Europe, is likely to remain negative. In the short term, the CNY should be supported by improving economic data."