China likely to ease monetary policy, but don’t expect the yuan to drop further, Citibank says

PUBLISHED : Tuesday, 10 July, 2018, 10:26am
UPDATED : Tuesday, 10 July, 2018, 10:26am

China may take the edge off tariff sanctions by easing its monetary policies, but policymakers will not seek to weaponise the yuan by a sharp depreciation, even as the trade war with the US gathers pace, according to Citibank.

The trade war unofficially began Friday when the US imposed tariffs on US$34 billion of Chinese imports, while China slapped taxes on an equal amount of American goods in response.

China is expected to cushion the impact from the punitive tariffs by implementing a 50 basis point cut in its reserve rate in the second half, said Wong Pak-ling, head of investment strategy and portfolio advisory, Citibank Hong Kong.

The People’s Bank of China announced a half percentage point cut in the reserve requirement ratio on June 24, which took effect Thursday, unlocking more than 700 billion yuan (US$105.8 billion) into the economy.

“China will have to ease credit conditions and prop up domestic demand to resist the pressure from the trade war,” Wong said.

China also planned to lower the tax burden on domestic retail investors and shore up domestic demand to help spur the economy, he added.

Citibank forecasts 6.5 per cent year-on-year annualised growth for the Chinese economy during the second half.

Wong said a further sharp depreciation of the yuan is unlikely at a time when China is seeking to unwind leverage and cool the property market.

Small and mid-sized companies without US dollar denominated revenue would be under huge financial strain to service US dollar debt if the yuan depreciates too sharply, he said.

The yuan has slumped by more than 4 per cent against the US dollar in the past month.

“Despite the chilly investing environment, I didn’t see any sign of a hard-landing for markets in China,” Wong said.

Stocks in China and Hong Kong have been under pressure amid mounting fears of a deepening trade conflict between Washington and Beijing in recent weeks.

China’s benchmark Shanghai Composite closed up 2.47 per cent, or 67.88 points, on Monday, ending the session at 2,815.11.

Hong Kong’s benchmark Hang Seng Index ended 1.32 per cent higher, or 372.88 points, to close at 28,688.5 on Monday.

Wong said Monday’s rally appeared driven by investor relief that there was no further escalation in tensions between the US and China over the weekend.

However, the volatility will haunt China’s stock market in the long term, he said.

“The market trend depends on the process of negotiations in the next few weeks, and whether China can maintain economic growth of 6.5 per cent this year,” he said.