Forex Flash: Chinese state council signals policy tightening in Q2 - Nomura

FXstreet.com (Barcelona) - Nomura economist Zhiwei Zhang notes that the Chinese State Council have signalled policy tightening in Q2 to contain financial risks.

He begins by noting that the council met yesterday to discuss economic conditions in Q1 and their policy objectives, with several interesting messages coming from the subsequent press conference.

Firstly, he notes that the government is comfortable with Q1 growth, and the press release says economic conditions are good and key indicators such as GDP growth and urban new jobs are stable at reasonable levels, something he feels suggests large scale policy stimulus is unlikely in Q2.

Secondly, he adds that the government fine-tuned its top policy objectives and highlighted the importance of “containing risks”. In the past, official documents had always referred to three policy objectives – stabilizing growth, controlling inflation and rebalancing the economy. He writes, “In documentation since December, however, “containing risks” had been added as a fourth objective. In this press release, “rebalancing the economy” was dropped, and “containing risks” promoted to the top three.”

Thirdly, he sees that this release was also more specific about the source of risks than earlier statements, as it focused on the two areas where the government will likely take action in Q2, rising local government debt and rapid credit growth. He writes, “This reinforces our view that in the coming quarters credit growth will likely slow, while GDP growth trends lower.