In its Q4 2017 monetary policy report, the People’s Bank of China (PBoC) reiterates its “prudent and neutral” monetary policy stance and continues to highlight financial stability as its top priority, notes the research team at Nomura.

Key Quotes

“We read this as a sign that financial deleveraging and the deepening of market reforms will remain in place for years.”

“Does this change our economic views? No. Financial deleveraging will continue to put downside pressure on economic growth.”

“Strategy implications?

• On rates, the report supports a neutral liquidity stance which supports our 2s5s repo steepener position. We will wait to see how money market rates evolve after the lunar new year holiday before reassessing our view on onshore fixed income products, although in the current conditions our inclination is positive.
• On FX, the emphasis on the role of market forces in determining the exchange rates is consistent with the longer-term objective of RMB internationalisation and achieving reserve-currency status. We also believe that the easing of outflow restrictions will be gradual.”