China commits to reform

Governor Yi reassured markets about China’s determination not only to reform its domestic monetary policy framework but also further open its financial sector.

"China is serious about its commitment to opening up its economy and reforming its financial markets.”

In his international debut as PBoC governor, Yi also made it clear China will not devalue its currency as a response to any trade war.

Most of the measures will be in place by June 30, Yi said, the first time China has provided a clear timeline on its financial market opening-up plans since the 19th Party Congress in October 2017.

Outward

As part of the changes, China will encourage foreign investment in its financial sector, including increasing the threshold of foreign ownership in insurance companies, security houses, asset management and futures companies to 51 per cent.

It will also remove foreign investment threshold in banks and asset management companies, as well as provide national treatment to foreign financial institutions.

On the market front, China will quadruple the daily trading quota on its Shanghai/Shenzhen-HK Stock Connect Scheme and aim to start the Shanghai-London Stock Connect by 2018.

In addition to opening up the financial markets, Yi also talked about China’s monetary policy outlook and reform directions in the future. According to Yi, China’s monetary policy will maintain a tightening bias on the back of global major central banks’ policy normalisation (he’s comfortable with the current China-US interest rate differential) and concerns over high leverage.

Yi also highlighted interest rate liberalisation and FX rate reforms, which will continue and be more market-driven in the future.

Positive

We view the announcement as a positive development (although some of the commitments were made last year following US president Donald Trump’s visit to China), especially because Governor Yi has given a clear timeline.

This may also help boost China’s further integration into global financial markets, including the possibility of Chinese bonds being included in global bond indices.

In his speech, Yi dismissed some market concerns about potential competitive devaluation in RMB on the back of escalating Sino-China trade tensions, constructive to the RMB’s FX rate.

We maintain our view China’s monetary policy will maintain a tightening bias and the seven-day reverse repo rate will be raised by another 30 basis points in 2018.

Betty Wang is Senior China Economist at ANZ