- EU and US sanctions on Russia ‘light touch’, while Putin recognises Crimea as sovereign state
- Short of military escalation or Iran-style sanctions, fall out for global economy likely limited
- China widened FX band and launched a new urbanisation plan as it pushes forward with reforms
Crimea referendum fall-out looking benign so far
In the referendum held on Sunday 97% of the voters (turn-out: 83%) supported integration of Crimea into Russia. The Crimean parliament voted on Monday to formally join the Russian Federation. According to a Russian press agency, President Putin has signed a decree recognizing Crimea as a sovereign state (without explicitly mentioning integration into the Russian Federation). Meanwhile, the EU and US launched a second stage of Russian sanctions on Monday. The EU will install travel bans for, and the freezing of assets of, 21 Russian and Ukrainian individuals. The US has announced similar sanctions for eleven officials. Their impact on cross-border trade or financial flows is still limited, but the EU and US made clear that more sanctions may follow if Russia does not end its military intervention in Crimea. Although developments are still highly in flux and sanctions could be sharpened further in the absence of de-escalation, we think that a full energy blockade ‘Iran-style’ is not likely given the EU’s reliance on Russian energy. In the absence of military escalation or Iran-style sanctions, the fall-out for the global economy is likely to remain limited. In fact, Russian assets and the rouble recovered somewhat on Monday as markets deemed the sanctions to be relatively ‘light-touch’. Furthermore, the mood on financial markets globally improved, also helped by encouraging US manufacturing data, suggesting the economy will shake off the bad weather before long.
China widens FX band to increase flexibility
China’s reform momentum continues. After several weeks of RMB depreciation, China widened the RMB trading band from 1% to 2% over the weekend. The last time this occurred was in April 2012, when it doubled the RMB trading band. The RMB daily trade fixing, however, remains in the hands of policy makers. As we already mentioned in March’s FX Monthly, a wider trading band will not automatically translate into a sharper pace of appreciation or depreciation in the currency given that Chinese authorities are able to heavily manage the direction in the currency. We, therefore, continue to expect a slight appreciation of the CNY in 2014 as we assume that growth will pick up later in the year. In our view RMB’s recent shift in policy in the run up to the widening of band was mainly directed at reducing speculative inflows into China.
China’s New Urbanisation Plan
In addition, China’s authorities presented the “National New-Type Urbanisation Plan”. This plan includes a massive building programme of transport networks, urban infrastructure and residential real estate from now until 2020. China’s urbanization ratio, which measures the urban population’s share of the total population, rose to 53.73% in 2013 from 52.57% in 2012. Although this is an improvement, the pace of urbanization has been slowing in the past three years and is far below the ratio of around 80% reported in advanced economies. Authorities plan to lift urbanization to 60% in 2020. This suggests that fixed investment growth could receive some support in the coming years. Indeed Chinese equities reacted positively to the plan. The authorities noted that cities with more than 200.000 residents will have a railway connection. This means that investments in railways remain a priority. When the economy showed some signs of weakness last year, investments in railways were also scaled up. The plan does not, however, give details on when restrictions will be lifted for land sales in rural areas, which is key to improving consumption growth in the rural areas. We think that urbanization is key for China to achieve its rebalancing strategy towards more consumption led growth in the coming years and stronger infrastructure investment to help the smooth the transition looks to be the way forward.