Financial Services Focus Group Quarterly Update – Q3 2015

Published on 2015-11-11

During Q3 2015, the Central Bank announced that it would continue to implement a prudent monetary policy and improve the financial system's capability to serve the real economy, ongoing trends from Q2 15.

We witnessed some upheaval in the Chinese stock exchanges with another major correction followed by strong government intervention. This also caused the Government to pledge to keep the RMB exchange rate "basically stable" (against the USD) in order to maintain financial stability, however, August 11 witnessed a significant devaluation (1.9%) of the RMB that has since remained around the 6.35 level against the USD. The short term outlook remains a possible further weakening to 6.50, before the RMB recovers back up to the 6.35 level -expected during 2016.

The slowdown in China’s GDP growth rate has attracted much press attention, but to be honest there is no sign of a hard landing and even the most bearish commentators seem to be easing up a little. Whether or not the real growth rate is as high as 6.9%, the perception is that for an economy the size of China’s that has been growing at a double digit rate – a more achievable and sustainable growth rate of nearer 6.5% is not a bad thing. The official target for 2015 remains 6.9%.

The gradual transformation to a consumer-led economy from an investment-led model continues apace with the services sector continuing to make significant contributions. Retail sales in Q3 held up well – particularly in some sectors (household / electronics / F&B) whilst there has been a slowdown in industrial production.

After a small adjustment, property prices particularly in Tier 1 and 2 cities are starting to pick up again, with housing sales rising steadily in Q3; the outlook for the economy would suggest continuing abatement through the rest of 2015 before a gentle pick up from Q1 2016.

The Government has continued to manage the transformation of the economy using the usual tools at its disposal. Q3 witnessed additional cuts in interest rates and RRR, the effects of which will be likely to feed through to the real economy in another 3 - 6 months. Interest rate reform has also continued, although some control is still levied by the PBOC through ‘soft’ means.

In terms of the reform agenda, there appears to have been a decrease in momentum that has disappointed few commentators. However, the IMF decision on whether to include the RMB in the SDR basket will certainly have a positive effect if approved. The ultimate goal of the Chinese remains to make the RMB fully convertible and a reserve currency, and the indications suggest that this policy is on track. In addition, the cross-border FX for corporates is likely to be relaxed and the Shanghai Hong Kong Stock Connect will also further open up and develop the country’s bond market. It is safe to say that we can expect increased usage of the RMB as a global trade and investment currency, as well as likely see it feature as a reserve currency among the IMF’s SDR basket of currencies.

Finally, in September we have seen the roll out of the China International Payment System (CIPS). The new system makes it easier to process international payment transfers in RMB. Onshore and offshore CNY rates have been converging and RMB internationalisation continues to be a major theme as RMB continues to play growing role in global trade settlement.