Thought November 05, 2019 / 09:54 am UTC

China: Trade optimism, Xi’s Message, PBoC Easing

By Zhao Defa

Speaking in Shanghai, President Xi Jinping vowed to open China’s economy further, building on stronger multilateral cooperation. Despite the People's Bank of China trimming the one-year MLF rate, USDCNH dipped below the psychological 7.000 level amid trade optimism. In our view, stakes are rising, risks to the ‘phase one’ trade deal have certainly increased.

Xi reiterated the importance of trade liberalism and multilateral cooperation. This comes after U.S. has reportedly considered removing September’s trade tariffs on China, spurring risk-on sentiments driving USDCNH down past the psychological 7.000.

He highlighted China’s willingness to sign more trade deals with other countries and sought to open its economy further to bolster foreign investments. More importantly, he vowed to boost the protection of intellectual property rights to allay investors’ concerns about intellectual property theft.

Xi’s tone was relatively amicable, which was a contrast from his speech last year, where he took a direct swipe at the U.S for their protectionist policies.

In our view, Xi’s reiteration of China’s pro-trade liberalization stance reinforced the country’s willingness to reach an interim resolution with the U.S., provided the terms tabled are reasonable. The recent WTO’s ruling in favor of China has provided it with some bargaining chips. However, China’s late push for the U.S. to make more concessions may potentially backfire and scupper an interim deal.

The PBoC has also cut its one-year medium-term facility rate (MLF) by 5 bps to 3.25% to address market liquidity concerns amid a slowing economy. This is likely to induce further cuts to the Loan Prime Rate for one-year loans. We expect three cuts of 5 bps over the next 15 months, bringing the rate to 4.05% by end-2020. However, we maintain the view of limited monetary policy easing due to transmission lags of additional monetary stimulus and high debt levels.

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Analyst Certification
I, Zhao Defa, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.