2022 Yuan Outlook: Fitch Predicts Modest Appreciation

2022 Yuan Outlook: Fitch Predicts Modest Appreciation

Table of Contents:

1. Introduction
2. Monetary Easing in China
3. Regulatory Risks in China
4. The Impact of Monetary Easing on Regulatory Risks
5. Signs of Policy Easing in China
6. Economic Effects of Policy Easing
7. Expectations for Economic Activity in the First Half of the Year
8. Expectations for Economic Activity in the Second Half of the Year
9. Policy Divergence between the PBOC and the Fed
10. Concerns for the Market and Potential Systemic Risks
11. Factors Influencing the Currency and Expectations for RMB Appreciation
12. External Factors Supporting the RMB
13. Quantifying Off-Balance Sheet Debt in China
14. Challenges in Assessing Debt Risk in China
15. Fiscal Easing and On-Balance Sheet Activity
16. Opacity in China's Economy and its Impact on Ratings
17. Government Measures and Support for Hong Kong Amidst the Virus Outbreak
18. Use of Fiscal Support Measures in Hong Kong
19. Hong Kong's Fiscal Reserve and its Role in Dealing with External Shocks

Monetary Easing in China and its Impact on Regulatory Risks

The People's Bank of China (PBOC) has recently implemented pro-growth policies focused on monetary easing. This raises the question of whether monetary easing can offset the regulatory risks currently seen in China. The signals from the PBOC indicate that not only monetary easing but also broader policy easing is underway in China. This trend was evident even in the fall, but with the recent cuts to the policy rate and the triple R cut in December, it suggests that things are now moving at a faster rate.

It is expected that there will be a few months before the economic effects of these measures are visible. Therefore, it is anticipated that the broader economic activity will be relatively weaker in the first half of the year, picking up pace in the second half. Despite this, there are concerns regarding the currency and policy diversions between the PBOC and the Federal Reserve.

Policy Divergence and Market Concerns

The Current policy divergence between the PBOC and the Fed is noteworthy. The two central banks have been moving in opposite directions, with the Fed hiking rates while the PBOC engages in monetary easing. This raises concerns for the market and the potential systemic risks that may arise.

Regarding the currency, there is a debate about the direction of the RMB. Fitch Ratings expects a modest appreciation in the currency this year, with a projected value of 6.7. The key theme here is the monetary policy divergence between the PBOC and the Fed. While the Fed is expected to Continue hiking rates, the PBOC is anticipated to cut the policy rate again in the first quarter.

Despite these developments, China's external balances continue to strengthen. Strong exports and a robust current account balance provide external buffers that support the currency. However, there is still some opacity in China's economy, particularly when it comes to off-balance sheet debt.

Challenges in Assessing Debt Risk in China

The assessment of debt risk in China is complicated due to the opacity in the country's economy. While there has been a shift from off-balance sheet to on-balance sheet activity, it is still difficult to quantify the full extent of debt risks. This opacity is reflected in Fitch Ratings' one notch adjustment downwards on China's rating, which currently stands at A+.

Despite these challenges, there are fiscal buffers available to address the risks. China's fiscal reserve is estimated to be around 25 to 30 percent of GDP, providing a potential source of support in the face of external shocks.

Government Measures in Hong Kong amidst the Virus Outbreak

The containment strategy for the virus outbreak in Hong Kong is expected to result in slower growth. In response, the government may implement fiscal support measures to provide assistance to affected sectors and citizens. Hong Kong's substantial fiscal reserve, estimated to be around 25 to 30 percent of GDP, can be utilized to mitigate the impact of the ongoing shutdowns.

While specific policy solutions are uncertain, it is evident that the authorities will use fiscal support measures to support those affected. The duration of the containment strategy may lead to a longer period of fiscal support.