Forex Flash: China rebalancing policy framework towards greater inflation focus - BBH

Ilan Solot, EM strategist at Brown Brothers Harriman believes that China is rebalancing its policy framework towards a slightly greater focus on inflation.

He expects this shift towards greater concern about inflation to be subtle, probably more subtle than most observers expect. He feels that policymakers will focus on slowing targeted sectors such as housing and parts of the (shadow) banking system, relying largely on macro-prudential measures instead of blunt instruments such as interest rates.

He writes, “If anything, an increase in deposit rates would seem the more logical course of action. If they are going to try to deflate the housing market, it would seem reasonable to offer an alternative form of savings given the negative real interest rates prevailing now. We see spot CNY trading largely sideways for the time being, but risks are tilted to the weak side. Officials have expressed a desire to keep China’s REER broadly stable this year and have stepped up their rhetoric about “currency wars.” In any case, the Japanese yen is setting the tone in Asia, so that’s what we should keep an eye on."