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Outlook for China’s Onshore Market February 7th, 2017 Mizuho Bank (China), Ltd. Treasury Division Copyright (c) Mizuho Bank, Ltd. All Rights Reserved. 1-1. Topics (1): Eleven currencies added to the CFETS Index, lowering the ratio of the U.S. dollar ¾ On December 29 last year, the China Foreign Exchange Trade System (CFETS) (an organization under the People’s Bank of China) announced its decision to add eleven currencies to the currency basket that makes up the CFETS Index. This change was applied as of January 1, 2017. The CFETS Index takes the trade weighted average as of the end of 2014 as 100. However, the details apart from the currencies have not yet been announced, including the detailed method of calculation, etc. ¾ Following the addition of the new basket currencies, the ratio has decreased for the U.S. dollar, the euro, and the Japanese yen, while the ratio has increased for the currencies of emerging countries. As the currencies of emerging countries are more volatile than major currencies in general, the CFETS Index may fluctuate more in the times ahead. In particular, market participants are likely to sell the overall emerging currencies when risk-averse sentiment strengthens in the market. In such a phase, the relative value of the Chinese yuan would increase. Therefore, some see the Chinese monetary authorities as being more likely to accept the depreciation against the U.S. dollar, which has a high composition ratio, in order to maintain the stability of the Chinese yuan. Change in the basket currencies in the CFETS Index Currency USD EUR JPY HKD GBP AUD NZD SGD CHF CAD MYR RUB THB ZAR KRW AED SAR HUF PLN DKK SEK NOK TRY MXN U.S. dollar Euro Japanese yen Hong Kong dollar British pound Australian dollar New Zealand dollar Singapore dollar Swiss franc Canadian dollar Malaysian ringgit Russian ruble Thai baht South African rand Korean won United Arab Emirates Dirham Saudi Arabian riyal Hungarian forint Polish zloty Danish krone Swedish krona Norwegian krone Turkish lira Mexican peso New 22.40% 16.34% 11.53% 4.28% 3.16% 4.40% 0.44% 3.21% 1.71% 2.15% 3.75% 2.63% 2.91% 1.78% 10.77% 1.87% 1.99% 0.31% 0.66% 0.40% 0.52% 0.27% 0.83% 1.69% Old 26.40% 21.39% 14.68% 6.55% 3.86% 6.27% 0.65% 3.82% 1.51% 2.53% 4.67% 4.36% 3.33% Rate of change -4.00% -5.05% -3.15% -2.27% -0.70% -1.87% -0.21% -0.61% 0.20% -0.38% -0.92% -1.73% -0.42% Performance (%, against Chinese yuan) since the end of 2014 by currency 16.00 12.00 * Period December 31, 2014-December 30 2016 14.61 12.00 11.91 11.91 The shaded currencies are the latest additions. 11.90 9.20 8.00 7.15 2.86 4.00 2.53 1.84 0.00 0.00 Latest additions -10.00 -0.47 -0.53 -1.32 -2.54 -2.71 -3.24 -3.48 -4.05 -5.29 -5.76 -11.34 -12.78 -20.00 -20.35 -30.00 -25.84 Source: Bloomberg 1 1-2 Topics (2): Gap between the onshore market (CNY) and the offshore market (CNH) expanded ¾ At the beginning of 2017, the Chinese yuan appreciated rapidly against the U.S. dollar in the offshore market. This was mainly due to the fact that Chinese yuan liquidity in the offshore market tightened dramatically because of the restrictions on capital outflow as strengthened by the Chinese monetary authorities, along with capital demand before the Chinese New Year, which sharply heightened interest rates. ¾ In addition, the minutes of the FOMC meeting in the U.S. (held on December 13 and 14) were released on January 4, revealing concerns over downward risks to the economy due to the appreciation of the U.S. dollar, and this heightened cautious sentiment toward the appreciation of the U.S. dollar in the market. The Chinese yuan appreciated against the U.S. dollar in the offshore market (CNH), and the exchange rate temporarily fell below CNH 6.80 to the U.S. dollar. Following this trend, the Chinese yuan in the onshore market (CNY) also appreciated against the U.S. dollar. As a result, as of January 6, the CNH-CNY gap was approximately 800 pips, with the Chinese yuan stronger in the offshore market. ¾ Even though the rapid appreciation of interest rates in the offshore market seems to be temporary, it is likely that the Chinese yuan interest rates will remain high until the end of the Chinese New Year. While the Chinese monetary authorities remain cautious, the trend in the Chinese yuan exchange market is expected to slow down for the time being. CNH and CNY exchange rate, with the spread between the two 7.0 6.9 0.20 CNH-CNY(右軸) CNH-CNY (right axis) CNY(左軸) CNY (left axis) 0.15 CNH (left axis) CNH(左軸) 7.00 0.04 * The chart shows the change after every 15 minutes. 6.95 0.02 0.00 0.10 6.8 -0.02 6.90 0.05 -0.04 6.7 0.00 6.85 -0.06 CNH-CNY(右軸) CNH-CNY (right axis) 6.6 -0.05 6.80 -0.08 CNY(左軸) CNY (left axis) CNH(左軸) CNH (left axis) 6.5 6.4 Jan-16 -0.10 -0.10 -0.15 Apr-16 Jul-16 Oct-16 Jan-17 6.75 2017/1/3 09:30 2017/1/4 09:30 2017/1/5 09:30 -0.12 2017/1/6 09:30 Source: Bloomberg 2 2. USD/CNY exchange market (latest trends) The one-sided appreciation of the U.S. dollar ended, and the Chinese yuan appreciated significantly. ¾ In the middle of December, ECB Governor Mario Draghi made an unexpectedly dovish remark after the ECB Committee meeting. As a result, the euro/U.S. dollar exchange rate fell even further. The Chinese yuan then depreciated against the U.S. dollar as well to 6.96 level. Thereafter, the number of market participants decreased before the Christmas holidays, and the U.S. dollar/Chinese yuan exchange rate kept moving between the 6.94 – 6.95 level. ¾ On January 3, the change in the currency basket for the CFETS Index mentioned on the previous slide was applied. However, the onshore Chinese yuan exchange market did not move significantly. ¾ On January 4, however, the minutes of the FOMC meeting turned out to not be as hawkish as expected, which encouraged market participants to sell the U.S. dollar. Furthermore, the Chinese yuan appreciated rapidly in the offshore market. As a result, the People’s Bank of China central parity rate rose to the CNY 6.86 level, with the Chinese yuan appreciating rapidly against the U.S. dollar. The appreciation range of the Chinese yuan was the largest seen since 2005. The onshore Chinese yuan appreciated against the U.S. dollar by more than 600 pips in one day. The U.S. dollar/Chinese yuan exchange rate once fell below CNY 6.87, although the exchange rate gradually returned to CNY 6.92 thereafter. ¾ On January 11, U.S. President-elect Donald Trump held a press conference, and a feeling of disappointment spread throughout the market, strengthening U.S. dollarselling. As a result, the Chinese yuan, which had gradually depreciated, started to appreciate again, and the U.S. dollar/Chinese yuan exchange rate reached the CNY 6.89 level. 104 103 U.S. dollar/Chinese yuan exchange rate and the U.S. dollar Index (over the past three months) 7.00 6.95 102 6.90 101 6.85 100 6.80 99 98 ドルインデックス(左軸) USD index (left axis) 97 ドル/人民元実勢相場(右軸) USD/CNY exchange rate (right axis) 6.75 6.70 96 PBOC fixing rate (right axis) 人民銀行仲値(右軸) 95 6.65 6.60 94 10月 October 11月 November 2016 12月 December January01月 2017 Source: Bloomberg 3 3. JPY/CNY exchange market (latest trends) The “Trump rally” slowed down, and the Japanese yen appreciated against the U.S. dollar. ¾ In the second half of December, the U.S. dollar/Japanese yen exchange rate rose steadily to approach the JPY 118 level because of the interest rate hike in the U.S., along with the expectations for the economic measures to be taken by U.S. President-elect Donald Trump. The Japanese yen once appreciated against the U.S. dollar thereafter toward the end of the year, as market participants sold accumulating long U.S. dollar positions to take profit, while geopolitical risks were heightening due to the terrorist attacks in Turkey and Germany. The Japanese yen/Chinese yuan exchange rate remained within a narrow range between CNY 5.90 and CNY 5.95. ¾ On January 4, the minutes of the FOMC meeting turned out to be not as hawkish as expected in the market. As a result, the U.S. dollar/Japanese yen exchange rate fell from the lower-JPY 117 level to the upper-JPY 115 level. Thereafter, at the press conference of U.S. President-elect Donald Trump, there was no mentioning of fiscal expansion or tax cut measures as was expected in the market. As a result, a sense of disappointment spread throughout the market, and the depreciation of the U.S. dollar accelerated. The U.S. dollar/Japanese yen exchange rate once fell below JPY 114. Also, the Japanese yen/Chinese yuan exchange rate rose rapidly to temporarily reach the CNY 6.05 level. The exchange rate returned to approach CNY 6.00 thereafter. 119 117 Japanese yen/Chinese yuan exchange rate and the U.S. dollar/Japanese yen exchange rate (over the past three months) 5.8 5.9 115 6.0 113 6.1 111 6.2 109 6.3 107 6.4 105 6.5 103 USD/JPY (left axis) ドル/円(左軸) 101 JPY/CNY (right axis, inverted) 円/人民元(右軸・反転) 99 October 10月 6.6 6.7 November 11月 2016 December 12月 01月 January 2017 Source: Bloomberg 4 4. Macro-economic data of China: Summary of economic indices Category Economic index Economic growth GDP (year-on-year) Economic trends Month 2016/3Q Result 6.70% Previous Comment 6.70% The economic growth rate remained at the same level as the last quarter, at +6.7%, the same as market expectations. There are many factors of uncertainty in the Chinese economy, and economic recovery remains slow. Even though the manufacturing PMI fell slightly from November, the figure remained above 50, the turning point in assessing the economic conditions for the fifth consecutive month. The Chinese economy has been gradually recovering. Manufacturing PMI Dec. 2016 51.4 51.7 Trade balance Dec. 2016 275.4 billion yuan 298.1 billion yuan Trade statistics Exports (year-on-year) (in Chinese yuan) Dec. 2016 0.6% 5.9% Imports (year-on-year) Dec. 2016 10.8% 13.0% CPI (year-on-year) Dec. 2016 2.1% 2.3% As price inflation slowed down for pork and vegetables, the December CPI declined slightly. As food prices are relatively stable, inflation pressure is likely to be limited on a short-term basis. PPI (year-on-year) Dec. 2016 5.5% 3.3% In addition to the fact that commodity prices appreciated, domestic demand increased, which kept the PPI high. Due to the production cut by the OPEC countries, the crude oil price is likely to continue appreciating. 11.4% The growth rate of the December M2 money supply turned out to be lower than expected in the market. However, because of vigorous capital demand by various industries, the year-on-year growth rate turned out be over 10%. As external demand remains low, the year-on-year growth in exports declined significantly compared to the previous month. On the other hand, imports turned out to be stronger than expected in the market, thanks to growing domestic demand, although year-on-year growth declined. The downward pressure on exports is expected to grow stronger in the times ahead, due to mounting uncertainty regarding the international trade policy toward China under the new U.S. government led by President Trump. Price statistics Monetary policy Money Supply M2 (year-on-year) Dec. 2016 11.3% Source: Bloomberg 5 5. Outlook for the Chinese yuan exchange market (end of each quarter) USD/CNY 100JPY/CNY CNY/JPY EUR/CNY 2017 January to March 6.80 to 7.10 (6.95) 5.62 15.63 6.94 to (5.89) 6.40 to 17.79 (17.0) to (7.16) 7.67 April to June July to September October to December 6.95 to 7.25 (7.10) 7.00 to 7.30 (7.17) 7.00 to 7.30 (7.17) 5.84 to (6.23) 5.93 to (6.46) 6.09 to (6.70) 15.03 7.16 6.65 to 17.12 (16.1) to (7.46) 7.98 14.79 7.35 6.76 to 16.86 (15.5) to (7.67) 8.25 14.38 7.35 6.95 to 16.43 (14.9) to (7.74) 8.25 Forecast by Mizuho Bank (China), Ltd. The figures in parentheses are forecasts for the closing rate of each quarter. Key factors 9 The financial market is expected to remain unstable for a while, given the unexpected victory of Donald Trump in the U.S. presidential election. 9 It seems that the Chinese monetary authorities will accept the moderate depreciation of the Chinese yuan while preventing excessive downside pressure on the Chinese yuan, in order to cover the decline in exports and pressure for capital outflow. 9 9 Pressure for capital outflow is likely to remain. The Chinese yuan is expected to continue moderately depreciating in 2017. 9 The inclusion of the Chinese yuan into the SDR currency basket (from October 1, 2016) is a factor to increase the composition ratio in foreign currency reserves among the IMF member countries in the medium-to-long term. The Chinese monetary authorities are likely to aim to achieve stability in the Chinese yuan exchange market in order to internationalize the Chinese yuan. 9 Under the Trump administration, the appreciation of the U.S. dollar is unlikely to continue. However, inflation risks may increase if there are more assertive fiscal policies and measures against reflation in 2017. Therefore, more interest rate hikes and the appreciation of the U.S. dollar are possible in the times ahead. 9 The Chinese yuan may depreciate under the management of the currency basket if the sense of uncertainty grows regarding the Brexit or if downward pressure strengthens on European currencies. There is no change in the 13th five-year plan and in the decision taken at the National People’s Congress held in March 2016, as well as in medium- to long-term economic support by the Chinese government. The main scenario is that L-shaped economic growth will continue for a while. 6 6. Trends in the Chinese yuan interest rate market ¾ As the main focus has been shifted from “growth support” to “curbing asset bubbles” and “preventing financial crises,” the monetary policy has also been shifted from “easing” to “neutral” in the direction of tightening. ¾ Market participants are well aware of the intentional raising of interest rates.* While fund procurement is necessary for the year-end and the Chinese New Year, the monetary conditions have been tightened as had been planned by the Chinese monetary authorities. As a result, the interest rate level has appreciated significantly. * It is also clear that the interest rates have been raised in order to clear bond leverage. * It is expected that off-balance sheet wealth management products will be treated in the same way as those that are on balance sheet transactions. ¾ Monetary tightening may continue throughout 2017. Major interest rates 14 12 4.2 O/N SHIBOR 1W SHIBOR 3M SHIBOR CDB2Y CDB3Y 3.8 3.4 3.0 10 2.6 2.2 8 1.8 Jan-16 6 Apr-16 Jul-16 Oct-16 Jan-17 4 2 0 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Source: Bloomberg 7 7. Upcoming key events China Date Jan. 20 Indices and events GDP Industrial production Jan. 20 Retail sales Manufacturing PMI Feb. 1 Non-manufacturing PMI Feb. 3 Caixin Manufacturing PMI in China Feb. 7 Caixin Services PMI in China Feb. 7 Foreign currency reserves Trade statistics Feb. 10 Feb. 14 CPI PPI Feb. 10-15 Money supply M2 Japan Date Jan. 25 Jan. 27 Indices and events December trade statistics CPI Unemployment ratio, effective opening-to-application ratio U.S. Date Jan. 18 Jan. 19 Jan. 26 Feb. 1 Indices and events CPI Housing starts New home sales Markit U.S. Manufacturing PMI Manufacturing ISM Report On Business Feb. 1 Feb. 3 Feb. 15 ADP employment statistics Employment statistics Retail sales Industrial production Jan. 31 FOMC (Until Feb. 1) Political events in the U.S. Date Events Jan. 20 Inauguration of the new government Speech to both houses Until May Budget message Europe Date Jan. 18 Jan. 24 Jan. 24 Jan. 25 Feb. 14 Feb. 14 Country EU EU Germany Germany Germany U.K. Feb. 14 EU Jan. 19 Feb. 2 EU U.K. Indices and events CPI Markit Eurozone Manufacturing PMI Markit Germany Manufacturing PMI IFO Business Climate Index ZEW CPI PPI Industrial production ECB Committee meeting MPC Political and economic events in Europe Indices and events Date Mar. 15 The Dutch House of Representatives election Apr. 23 First voting for the French presidential election May 7 Final voting for the French presidential election "First hundred days" Jan. 30 BOJ monetary policy meeting (Until Jan. 31) Sep. 30 Oct. 1 Submission deadline for budget proposal for the year 2018 Start of the budget for the year 2018 Source: Bloomberg 8 8. Global market: USD/JPY exchange market (over the past year) 130 Period: January 1, 2016 to January 11, 2017 USD/JPY exchange rate: JPY 99.02-121.69 125 January 29 The BOJ decided to introduce a negative interest rate. 120 March 29 FRB Chair Janet Yellen made a cautious statement regarding the interest rate hike. June 24 There was a rapid appreciation of the Japanese yen caused by risk-averse sentiment in the market, resulting from the Brexit. July 29 The BOJ made a decision on additional measures of monetary easing, although the scale was smaller than the market expectations. Also, the GDP of the U.S. in the second quarter turned out to be weaker than expected. 115 110 December 14 The interest rate was raised in the U.S. September 21 The BOJ decided to introduce additional measures of monetary easing (yield curve control and overshooting commitment). 105 100 95 January 01月 April 28 The BOJ unexpectedly decided to maintain the existing monetary policy. July 8 and August 5 The employment statistics of the U.S. turned out to be significantly stronger than expected. April 04月 July 07月 October 10月 November 9 Against market expectations, Donald Trump was elected as the next U.S. President. January 01月 2016 2017 Source: Bloomberg 9 9. Global market: EUR/USD exchange market (over the past year) Period: January 1, 2016 to January 11, 2017 EUR/USD exchange rate: USD 1.0341-1.1616 October 4 The media reported that the ECB slowed down asset purchase (tapering). → The report was denied thereafter. 1.17 1.15 November 9 Against market expectations, Donald Trump was elected as the next U.S. President. 1.13 December 8 Decision to extend the bond purchasing program 1.11 1.09 1.07 1.05 January 21 ECB Governor Mario Draghi expressed his intention to revise the monetary policy at the next ECB meeting. 1.03 January 01月 March 10 ECB Governor Mario Draghi stated that there would be no more measures of monetary easing, after the announcement of an additional measure of monetary easing. April 04月 June 24 Pressure to sell the euro strengthened, due to the Brexit. July 8 and August 5 The employment statistics of the U.S. turned out to be significantly stronger than expected. July 07月 2016 October 10月 January 01月 2017 Source: Bloomberg 10 10. Summary: Outlook for major currencies (end of each quarter) 2017 January to March USD/JPY EUR/USD EUR/JPY April to June July to September October to December 111 to 121 (118) 109 to 119 (114) 108 to 118 (111) 105 to 115 (107) 1.02 to 1.08 (1.03) 1.03 to 1.10 (1.05) 1.05 to 1.13 (1.07) 1.05 to 1.13 (1.08) 113 to 124 (118) 112 to 123 (117) 113 to 124 (116) 110 to 121 (112) Forecast by Mizuho Bank (China), Ltd. The figures in parentheses are forecasts for the closing rate of each quarter. Key factors 9 Outlook for the U.S. dollar/Japanese yen exchange market in 2017: “Game of chicken” between U.S. politics under Trump and the U.S. dollar exchange market Important facts: 9 2016 was the “beginning of the end” of the appreciation of the U.S. dollar. This trend is expected to continue in 2017. 9 U.S. dollar: The impact of the appreciation of the U.S. dollar has not yet been settled. Would this be acceptable for President-elect Donald Trump? 9 Japanese yen: While there have been limited measures taken by the Bank of Japan, the Japanese yen exchange market will have to follow the settlement in the U.S. dollar exchange market. 9 Euro: The fundamentals have been robust. As is the case with the Japanese yen, it is likely to be easy for the euro to appreciate. 11 Reference (1): USD/CNY exchange market (over the past year) 7.0 Period: January 4, 2016 to January 11, 2017 USD/CNY exchange rate: CNY 6.4502-6.9666 6.9 6.8 January 4 The trading hours in the inter-bank foreign exchange market were extended (until 23:30). January 8 Even though the circuit breaker system was introduced on January 4, the system was discontinued on the fifth business day due to the rapid depreciation of stock prices. June 24 Risk-averse sentiment grew in the market as a result of the Brexit referendum. October 1 The Chinese yuan was included in the SDR currency basket. January 4 Following the rapid appreciation of CNH, CNY also appreciated against the U.S. dollar. 6.7 March 1 The RRR was cut. (17.5% →17.0%) 6.6 May 18 The minutes of the FOMC meeting in the U.S. turned out to be hawkish, which fueled expectations for an interest rate hike in the U.S., leading the U.S. dollar to appreciate against the Chinese yuan. 6.5 6.4 January 01月 April 04月 July 07月 2016 October 10月 November 9 Against market expectations, Donald Trump was elected as the next U.S. President. November 10 The U.S. dollar/Chinese yuan exchange rate exceeded CNY 6.80 for the first time since September 2010. The Chinese yuan continued to depreciate because of the uptrend in the U.S. dollar exchange market. January 01月 2017 Source: Bloomberg 12 Reference (2): JPY/CNY exchange market (over the past year) 130 Period: January 4, 2016 to January 11, 2017 JPY/CNY exchange rate: CNY 5.4117-6.6598 January 29 The BOJ decided to introduce a negative interest rate 125 120 115 110 105 April 28 The BOJ unexpectedly decided to maintain the existing monetary policy at its meeting. 100 July 29 Although the BOJ decided to introduce additional measures of monetary easing, the scale was smaller than the market expected. The second quarter GDP of the U.S. turned out to be weaker than the market expected. November 9 Against market expectations, Donald Trump was elected as the next U.S. President. December 14 The interest rate was raised in the U.S. 5.0 5.2 5.4 September 21 The BOJ decided to introduce additional measures of monetary easing (yield curve control and overshooting commitment). 5.6 5.8 6.0 6.2 June 24 The Japanese yen appreciated sharply due to risk-averse sentiment after the Brexit referendum. 6.4 ドル/円(左軸) USD/JPY (left axis) 6.6 JPY/CNY (right axis, inverted) 円/人民元(右軸・反転) 95 January 01月 2016 6.8 April 04月 July 07月 October 10月 January 01月 2017 Source: Bloomberg 13 Reference (3): Chinese yuan exchange market since 2005 2005: Commencement of the revaluation of the Chinese yuan 2008-2009: Temporary introduction of a fixed exchange rate system after the financial crisis in the U.S.; resumption of the appreciation of the Chinese yuan in 2010 2014: Depreciation of the Chinese yuan once again after the interest rate cut in Nov., despite the Chinese yuan exchange rate fluctuating in both directions 2015: Calculation method for the central parity rate changed by the People’s Bank of China on August 11, which meant the devaluation of China's currency (from the CNY 6.21 level to the CNY 6.40 level) ¾ 2016: Depreciation of the Chinese yuan against the U.S. dollar to the level seen in 2011, at the beginning of the year; despite the Chinese yuan rallying after the Chinese New Year, after which, another commencement of the depreciation of the Chinese yuan against the U.S. dollar; continued depreciation of the Chinese yuan to its lowest level since 2008 as a result of risk-averse sentiment in the market after the victory of the supporters of the Brexit in the referendum carried out in the U.K. in June, as well as expectations for economic stimulus after the victory of Donald Trump in the U.S. presidential election carried out in Nov. ¾ ¾ ¾ ¾ The Chinese monetary authority announced its plan to enhance the flexibility of the exchange rate. 8.0 7.5 6.5 China started to reform foreign exchange control, shifting to a managed floating rate system, referring to the currency basket. March 17, 2014 Widened the fluctuation band of the yuan's exchange rate August 11, 2015 PBOC devalued the Chinese yuan CNY appreciation 7.0 Revaluation of the Chinese yuan by 2.1% on July 21, 2005 April 14, 2012 Widened the fluctuation band of the yuan's exchange rate CNY depreciation U.S. dollar/Chinese yuan exchange rate 8.5 6.0 05 9.5 06 07 08 09 10 11 12 13 14 15 16 17 10 11 12 13 14 15 16 17 CNY depreciation Japanese yen/Chinese yuan exchange rate 8.5 7.5 CNY appreciation 6.5 5.5 4.5 05 06 07 08 09 Source: Bloomberg 14 Notice and Contact Information Regarding This Document All information included in this proposal should not be regarded as any legal, accounting or taxation advice from Mizuho. No person should rely on the contents of such information without obtaining prior advice from any qualified professional expert's) in each relevant sector. 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