China’s major A share indices traded higher in the first month of 2017 thanks to the positive message delivered by the Chinese top leader and the favorable monetary support by the central bank ahead of the Chinese New Year holiday. China delivered a strong signal of liberalization in January, a one-two punch that saw President Xi promoting globalization at Davos while China’s State Council announced 20 measures to encourage overseas investment in China.
In his keynote speech to global political and business leaders, President Xi affirmed China’s commitment to global trade and governance while railing against encroaching protectionist sentiments. While acknowledging the downsides of globalization, Xi articulated the importance of pushing forward and the impossibility of reversion to a mercantilist past. His attendance and comments evince China’s concern about the impact of growing populist headwinds on China’s export machine, and signal China’s attempt to address the situation by consolidating leadership in the current global vacuum.
After Xi’s speech, China’s State Council published new rules reducing restrictions on foreign investment in the country. The reforms cover a range of industries, allowing foreign investors to enter fields such as transportation, industrial and automotive manufacturing, telecommunications, internet, and education— in some instances even receiving preferential policy support from local governments. In addition, a top Ministry of Commerce official promoted reforms that would cultivate a financial climate more hospitable to foreign companies. Under such reforms, foreign companies will be able to issue debt instruments to raise funds in China’s capital markets or list on Mainland China’s stock exchanges.
Meanwhile, China’s central bank injected more than RMB 410 billion (USD 60 billion) during the month, a ‘temporary facility’ to help ease a liquidity crunch ahead of the Chinese New Year holiday. Short-term funding costs reached a ten-year high ahead of the week-long holiday, which sees hundreds of millions of celebrants withdrawing cash to visit family and exchange the traditional money-laden red envelopes.
The injection is significant because it represents a new policy tool in the PBOC’s arsenal, a subtle departure from favored mechanisms like reverse repurchases and 3-month Medium-term Lending Facilities. Citing the desire to balance seasonal liquidity demands while avoiding Yuan depreciation, the bank is relying on the temporary facilities instead of more traditional Required Reserve Ratio (RRR) cuts to avoid sending easing signals. The bank maintains the 28 day facility is temporary, not a reversal of the stated “prudent and neutral” monetary policy goals for 2017.
Economic activities will gradually recover in February as Chinese start to come back work for the Year of Rooster. In the Chinese culture, the rooster is a well respected and hard-working animal because it wakes up early in the morning and reminds people of working for their dream. We wish our investors a healthy and fruitful Year of Rooster.
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