FX comment – China lowers 2015 GDP target from 7.5% to 7%; Chinese yuan to ease lower to 6.35 by the end of 2015

by: Roy Teo

  • China lowers 2015 GDP target from 7.5% to 7%
  • Chinese yuan expected to ease to 6.35 by the end of 2015

 

China lowers 2015 GDP target from 7.5% to 7%

As widely anticipated, China plans to lower this year’s GDP target from 7.5% to 7%, according to a draft government work report to be delivered by Premier Li to the National People’s Congress. The upper bound of consumer price inflation is targeted to be 3%, lower by 50bp from last year’s goal. Export growth has also been lowered from 7.5% to 6%, which is still higher than the 4.9% achieved last year. Similarly, M2 growth target has also been lowered from 14.7% to 12% with the fiscal deficit expected to increase 0.2pp to 2.3% of GDP. Separately the People’s Bank of China (PBoC) adviser Chen said that monetary policy may ease further in the second quarter of this year (in line with our view) and that there is no need to widen the currency trading band this year.

Chinese yuan expected to ease to 6.35 by the end of 2015

As elaborated in our FX Watch – More bearish on Chinese yuan published on 11 February 2015, we continue to expect a weaker yuan towards 6.35 as we expect Chinese authorities to allow a weaker onshore yuan reference rate to support the economy. In addition, economic growth and monetary policy divergence between the US and China is expected to widen this year, which should favour a stronger US dollar against the yuan. Though the PBoC adviser has poured cold water on market speculation and our view that the yuan trading band could be widened this year, we still do not rule out that this may materialise this year. This is because a wider trading band will be in line with the central bank’s goal of allowing a more flexible exchange rate ahead of IMF review to include the yuan in the Special Drawing Rights basket later this year. A wider trading band will also reduce the need for the central bank to defend weakness in the currency, which has been trading at the weaker 2% limit of the trading band.