Emerging Market FX: Chinese Government Annual Meeting Takeaways
- The most import target was GDP, which was set between 6.5 and 7.0% for 2016 and “at least 6.5%” for the next 5 years. They were as expected, as well as most targets (e.g. CPI target of 3%, financial market and fx policy). The 6.5% minimum growth target for the next 5 years is too high and is a disappointment for seeing potential acceleration in reforms
- More policy support. The government signaled more support from monetary and fiscal policy. The M2 (money supply) target increased to 13%yoy compared to 12% target in 2015. The government stated that it will “increase the flexibility of our prudent monetary policy”, meaning it will ease policy more. On the fiscal front, the government deficit will increase to 3% of GDP in 2016 compared to 2.4% in 2015. It’s a good 25% increase in fiscal stimulus compared to 2015
- China’s payroll Friday and social stability. The biggest market moving data release in the world is US payrolls since it drives Fed policy. Employment is very important since the US is a service based economy and services are labor intensive. Employment is the best proxy to how the service sector is doing and the overall economy. China’s service sector is now over 50% of the economy and we think Chinese payroll data will matter more and more. China set the new urban jobs target to 10 million per annum for the next 5 years. The 10 million target should be an easy considering over 13 million new urban jobs were created in 2015, 2014 and 2013. However, this will be the most important data for China going forward as services grow and employment is key to keep social stability as the economy slows. Yellen has stated that US needs about 100,000 jobs a month to keep the unemployment rate steady. Chinese leaders think about 833,333 jobs a month are needed to keep things stable.
- Supporting the property market. The authorities are focused on reducing residential housing inventory, a problem in lower tiered cities (3rd tier and below). It is encouraging institutional investors to buy and lease housing to reduce inventory, something that is mainstream in developed countries. This gels with the recent news flow where macro-prudential measures are loosening and mortgage interest rates are falling. We could get an earlier than expected recovery in the general housing market (1st and 2nd tier are fine) and something we think is the biggest upside risk for 2016/2017.
The next bubble/problem will likely be in R&D. China has historically chosen certain industries to support for development. Now, the focus is on Research and Development (R&D) where spending target is 2.5% of GDP per year (about $2.5trn USD) for the next 5 years. This is a noticeable increase compared to 2.05% in 2014 and 2.0% in 2013. When government starts focusing on industries, banks provide favorable borrowing terms and local government officials push for growth in these sectors regardless of future costs. The next NPL problem will likely come in R&D and technology but in the next 1-2 years, this sector should blossom from the favorable incentives and government focus.
Technical & Trading Takeaways
I believe there will be an excellent risk reward with trend entry as price retests former spike highs and ascending channel support at the the 6.4700/6.4500 level where I would be watching for intraday reversal patterns to venture long targeting the topside of the channel. My interest in this trading level has increased with the current price pattern setting up a symmetrical AB=CD decline into the support zone as highlighted in the chart below.
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