The PBOC had a busy Tuesday, adjusting the currency and announcing modestly improved lending numbers.
PBOC throws a bone to exporters
China's yuan fixing was dropped 1.9% overnight by the PBOC, throwing a bone to exporters under siege by competitors with devalued currency advantages this year (see my posting China Trade Numbers Decline As Beijing Maintains Strong CNY, And Commodity Prices Decline.). All in all, a 2% devalue is pretty modest in comparison to the double digit rise in the CNY against most major currencies.
It is important to note that the devalue was part of an overall methodology change intended to make the mechanism for setting the fixing rate more market friendly. The changes and devalue for that reason were very shrewd: The lower currency helps exporters and stimulates growth, and the market mechanism changes keep the IMF from getting spooked. The IMF has explicitly welcomed the market-oriented changes Beijing has made Tuesday to the mechanisms used to set the fixing. Beijing sees getting into the SDR as an important step towards becoming a major reserve currency.
Expect more market interventions in the future as the new market-oriented mechanisms force the PBOC to relinquish some control and subsequently intervene to stabilize the FX.
China's strong currency has been a meaningful headwind to exporters, as seen in the sizable trade number declines in July. Most trading partner currencies have tanked vs. the yuan, leaving China's export sector at a significant disadvantage and driving down inflation. The CNY this year had appreciated 17% on the Euro, 18% vs. the Japanese yen, and 11% vs. the Korean won up to Monday this week before the lower fixing.
Why the PBOC acted:
- Beijing's plans to keep the CNY stable against the US dollar has subjected the yuan to dollar strength at the expense of the export sector.
- Importing inflation is not a problem, as CPI is running at half of the target this year.
- Given money supply is well above the target of 12%, loan growth is up, and fiscal stimulus is already in the pipeline, a currency adjustment is a stimulative policy option not yet employed this year.
China credit was subject to stock market activity and the continued reduction of shadow banking.
China's July lending and credit numbers rose in July, with total outstanding loans up well above 15% and money supply surging above the 12% target at 13.3% from July of last year. The data and PBOC comments point to two factors at play: The dramatic stock market activity, and the continued reduction of shadow banking activity.
First, China's credit numbers were heavily influenced by activity in the stock markets and PBOC interventions in July. Outstanding bank loan growth accelerated, but total financing slowed measurably as margin reduction activity reduced overall debt and credit growth. Overall credit numbers are no boon to short-term activity. The PBOC in a statement said "In order to stabilise market expectations, guard against financial risks, and support healthy capital market development, monetary policy and the banking system in July took a series of temporary measures. Such measures also influence the growth of money supply and loans."
Second, China's non-traditional credit continues to decelerate. Trust loan growth is still fading. Entrusted loans continue to weaken. Beijing's efforts to reduce the opaque local debt and shadow banking activities are moving forward.
All in all, the weaker currency should help exports and manufacturing, but given the minimal amount of devaluation, only modestly. The lending numbers were distorted this month by stock market activities, but the weak overall credit growth will not be helpful to boost short-term growth.