Daily Insight – A close eye on Ukraine and China

by: Maritza Cabezas , Arjen van Dijkhuizen , Georgette Boele

Global-Daily-Insight-5-March-2014.pdf ()
  • China’s National People’s Conference (NPC) will focus on economic targets and reform…
  • …while policy will shift to a less credit and investment driven economy
  • Ukraine-Russia tensions ease slightly

Main issues to watch during China’s NPC

The 12th National People’s Congress, which gathers top political advisory bodies, will convene on 5 March, likely concluding around 13 March. During this meeting, the main issues to watch are the 2014 economic targets that will likely be announced by authorities and progress in the reform agenda. Although the 12th Five Year Plan announced in 2011 already sketches the path of China’s economy in the coming years, this meeting should provide more details of what is expected in 2014. For instance, lowering the growth target from 7.5% in 2013 to 7% would be an indication that China’s leaders are tolerant to lower growth in their efforts to reform the economy. We expect the government to maintain its GDP growth target at 7.5%, while inflation should be around 3.5%, suggesting that many meaningful reforms will take place further down the road. Monetary policy growth should remain prudent at similar rates as in 2013, while credit policy should continue to slow down, but only at a gradual pace. It will be difficult for authorities to assess to what extent the reforms will affect economic activity. This is one of the reasons why they could decide not to announce a GDP growth target this time

Reform momentum will continue

Although the past months have been somewhat volatile and tinted with uncertainty, we think that much of the unrest was policy driven to encourage more discipline, particularly in the financial sector. Nonetheless, volatility has already dragged on growth and sentiment. Indeed, China’s NBS manufacturing PMI released earlier this week eased to 50.1 in February compared to 50.5 the previous month. This was the third consecutive month that the PMI reported a decline.

As for the reforms, authorities have clearly shown that they are committed to lead financial and local government debt reforms. However, as part of the political agenda there are topics that will be inevitably included such as environmental issues and perhaps national security as a result of the recent ethnic killings. Given that the privatisation of state-owned enterprises is a controversial reform, we don’t expect many details to be released this time.

Ukraine-Russia tensions ease slightly

Tensions between Russia and Ukraine remain high, but seem to have eased somewhat after President Putin on Tuesday morning ordered troops (which took part in exercises close to the Ukrainian border) back to base. Still, the Russians have reportedly strengthened their presence on the Crimea. Later in the day, Putin stated that Russia would only use military force in Ukraine as a last resort, in remarks apparently intended to ease East-West tensions. Still, Putin added that Russia reserved the right to use all options to protect its compatriots living in Ukraine, referring to the ousting of former Ukrainian president Yanukovich as an anti-constitutional coup. Meanwhile, Western countries have announced economic sanctions (the EU will hold a summit on Thursday). US Secretary of State John Kerry and the IMF have arrived in Kiev to discuss an economic support package to prevent an external default. Ukraine has asked the IMF for a loan worth at least USD 15 bn. The IMF loan will probably be accompanied by bilateral assistance from the EU, US and other countries. Kerry has offered USD 1 bn in American loan guarantees and pledges of technical assistance. As a result of these developments, risk aversion in financial markets faded somewhat. The US dollar, Swiss franc, Japanese yen and gold eased lower, while the Ukrainian Hryvnia and the Russian ruble recovered. US Treasury and German Bund yield rose. Furthermore, equity markets and commodity prices also moved higher.