GDP growth is set to exceed this year's target of 'around 6.5%', which should give comfort to authorities in their drive to de-lever the financial sector. Sacrificing some short-term growth stability/momentum in the interest of long-term growth sustainability is likely to be reinforced during the China Economic Working Conference (EWC) this month - before it is officially codified (via lower growth/credit targets) during the National People's Congress in Mar-2018.
As China slowly resolves its domestic burden, it's likely to look elsewhere for a growth stabilizer - and this could be export markets. A move (once again) towards an RMB depreciation policy (versus the CFETS basket) would be an attractive policy option to improve FX competitiveness while exporting capacity via the Belt & Road initiative. Trade frictions with the US/EU makes a stealth/gradual FX depreciation policy less of a taboo. There is a secular trend of foreign inflows into the bond and equity market (instead of MSCI in mid-2018, watch for more substantial inflows via JPM GBIEM/Citi WGBI over the next 6mths) and this counter-balances potential domestic outflows once a depreciation policy becomes evident (via the fixes and the CFETS TWI index). Stabilizing FX reserves - and greater control/scrutiny over Overseas Direct Investment (ODI) - make gradual reserve drawdowns less alarming than in the past.
Long SGD-CNH is our preferred trade to express a RMB basket depreciation policy given similar underlying basket constituents. SGD NEER is on the rich side of the trading band (likely to stay here pre-MAS April meeting), but an RMB depreciation policy means that CNH should underperform the SGD, particularly during periods of modest USD depreciation.
Higher SGD-CNH as RMB to lag SGD. Most gains expected during 1Q18.