China strikes a dovish tone on the policy stance – Standard Chartered

The Central Economic Work Conference (CEWC) ended on 18 December, setting the policy tone and economic priorities for 2021. China is set to continue to implement ‘proactive fiscal policy’ and ‘prudent monetary policy’ in 2021 while economists at Standard Chartered continue to expect gradual credit tightening and fiscal consolidation in 2021, but no policy rate hikes.  

The USD/CNY pair is currently trading at 6.5495, having peaked at 7.1766 in May this year.

Key quotes

“Economic policy must maintain continuity, stability and sustainability in 2021, as the foundation of the economic recovery is not solid, according to the CEWC. China should maintain ‘proactive fiscal policy’ and ‘prudent monetary policy’, with no sharp policy turns in 2021; ‘flexible, accurate and appropriate’ monetary policy to keep money supply and total social financing (TSF) growth consistent with nominal economic growth to stabilise the macro leverage ratio; and aim fiscal policy at improving efficiency and sustainability, maintaining appropriate expenditure and ensuring support for major national strategic objectives.”

“The CEWC also reiterated that China would maintain the CNY exchange rate at a reasonable and balanced level, and deepen market-oriented reforms of the interest and exchange rates.”

“We expect the official budget deficit to be lowered to 2.8% of GDP in 2021 from 3.6% budgeted in 2020. The broad budget deficit is likely to be lowered to c.6% of GDP in 2021, from an expected actual deficit of 8% in 2020.”