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Ready for the 19th Congress 10/18/2017
The authorities have activated all leverages to guarantee stability in 2017, in preparation for this month’s 19th National Congress of the Communist Party. Economic growth accelerated slightly in the first half. In the financial system, monetary and regulatory tightening has triggered deleveraging among banks and non-bank institutions, which should help curtail some of their most risky activities. While household debt continues to rise, but remains moderate, the increase in corporate debt has slowed. The authorities have also managed to reduce capital outflows and to stop the fall in foreign exchange reserves, while the yuan has rebounded against the dollar since the beginning of the year.
China: visible effects of capital control tightening 10/11/2017
In 2014-2016, net capital inflows by non-residents have declined while net capital outflows by residents have increased rapidly, as a result  of lower economic growth prospects and changing expectations over the evolution of the yuan in a context of capital account opening, exchange rate policy reform and global expansion of Chinese firms. These dynamics have contributed to the fall in forex reserves (-20% between end-2013 and end-2016) and to the depreciation of the renminbi against the dollar (-14%). Since mid-2015, the authorities have tightened gradually controls on capital outflows. Net capital outflows (debt flows and portfolio investments) have declined, and net flows in direct investment have become positive again in Q2 2017 (4-quarter moving sum). Net foreign direct investment in China has remained on a downward trend while Chinese overseas direct investment has declined since Q4 2016 given the intensification of controls. In 2017, forex reserves have increased again (to USD 3109 bn in September) and the renminbi has appreciated against the dollar.
Less credit should mean slower economic growth 7/11/2017
Monetary tightening and a stricter prudential and regulatory framework for the financial sector should curb domestic credit growth in 2017. For the time being, the main consequences are a slowdown in interbank financing, a bond market correction and the slower expansion of certain shadow banking activities. Commercial bank loan growth has not really decelerated yet. The slower growth in the real estate sector in recent months could spread to other sectors that are credit-dependent, and economic growth is likely to slow again in the quarters ahead.
Danger in China's financial nebula 6/27/2017
Vulnerabilities in the Chinese financial sector have increased significantly in the past decade. Given the high level and multiple sources of credit and liquidity risks and the opacity of both shadow banking activities and links between banks and non-bank institutions, containing these vulnerabilities poses a major challenge for the authorities. Measures recently taken to tighten monetary conditions and continued efforts to strengthen financial-sector supervision are positive actions. However, they could also weigh on economic activity, and the government’s resolve to stay the course on slowing the growth of domestic debt should soon be put to the test once again.
China A shares in MSCI index: the carrot and the stick 6/23/2017
In June 2018 MSCI will include China A shares in its Emerging Markets index. Inclusion in the MSCI index acts as a carrot for Chinese companies, but also to some degree as a stick as well.
China: monetary policy tightening has begun 6/21/2017
China’s central bank has started to tighten monetary conditions since Q4 2016, principally via the rise in repo rates and the increase in the rates on its “liquidity facilities”. Recent policy actions have had some impact on the interbank market, where growth in financing of non-bank financial institutions has slowed rapidly, and on the domestic bond market where rates have soared and bond issuance has stopped rising, interrupting several years of steady expansion. So far, growth in total credit, measured by “social financing” has not slowed. Growth in bank loans decelerated slightly in Q1 2017 but reaccelerated in April and May (standing at 12.8% year-on-year in May) while the lower bond financing has been partly compensated for faster growth in trust loans. However, we expect that total domestic debt growth will slow moderately in the short term, assuming that prudent monetary policy tightening will continue and that the authorities make further progress in strengthening regulation in the financial sector.  
China: Manufacturing momentum and commodity prices, two sides of the same coin? 5/24/2017
After rising significantly in 2016, the Chinese manufacturing PMI has weakened as of late. This has been accompanied by a decline in the industrial metals commodity price index. Chart 1 shows that historically the Chinese PMI and metals prices have moved up and down together most of the time. This reflects China’s commodity intensive growth model based on corporate investment and construction activity.  The second chart provides a more precise picture of this relationship by means of the 12 month rolling correlation. Although this correlation reaches high levels quite often, it has also experienced strong dips. Recently this has been the case towards the end of 2014 and in mid-2016. It seems that on these occasions the drop in oil prices (the grey line in chart 1) has pulled along metals prices. This could reflect bearish growth expectations of investors with the big drop in oil prices raising concern about the outlook for energy producers. Taking both charts together, they would imply that when looking at metals prices as a proxy for Chinese growth momentum, it is recommended to check the behaviour and hence influence of oil prices as well.
PBOC is acting to reduce financial risks 4/28/2017
Recent growth acceleration has enabled China's central bank to start to tighten its monetary policy, but downside risks to short-term economic prospects remain high and the authorities' determination to contain financial risks could be tested rapidly in case of another slowdown in economic activity.

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