Resilient private sector consumption and a recovery in exports provide a growth buffer to China’s economy, but trade friction with the US has injected uncertainty into future export performance. Potentially lower fiscal revenue growth coupled with a lower deficit target indicates fewer plans to promote government infrastructure spending, in our view. This could put downward pressure on fixed asset investment growth this year.

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Lower domestic interest rates. Recent regulatory tightening, especially related to interbank activities and non-bank financial institutions, has already encouraged participants to reduce financial leverage. Therefore, we believe the need for the PBOC to use short-term interest rates to curb leverage has been reduced.

China’s mostly closed capital account and recent weak performance of the US dollar also allow the PBOC to act relatively independently of the US Federal Reserve rate hiking cycle. As such, we expect the PBOC to leave benchmark interest rates unchanged. This has led us to be more bullish than the market on Chinese onshore rates, and we see room for Chinese bond yields to trend down.

Currency cues from US dollar. Trade friction may complicate the performance of the renminbi, but it will likely continue to be driven by US dollar performance. If China’s trade surplus narrows due to greater US protectionism, it could put downward pressure on the renminbi.

In contrast, a global risk-off episode that causes a sharp rise in the Japanese yen and euro versus the US dollar would likely cause the renminbi to appreciate. For now, we expect the renminbi to trade in its current range of 6.3 to 6.5.2

Conclusion

China’s changing set of macro policies points to potentially slower economic growth and strengthened financial oversight. Liquidity should remain sufficient, but weaker credits could experience tighter financing conditions. This leads to our overweight position in Chinese interest rates, neutral view on the currency and cautious stance on credit spreads of issuers with weaker credit profiles.

This article was republished with permission from Invesco Powershares.