China's Record Trade Balance, Rate Cuts and Digital Currencies

China’s Q4’21 real GDP slowed to +4%yoy, (from 4.9% in Q3’21), beating expectations for +3.3%yoy growth, and full year GDP came in at +8.1% in 2021, well above the central bank’s 6% annual target. If we look a bit deeper into the breakdown, consumption was the main driver of growth at 5.3% while investments contributed 1.1%, exports also remained strong at a 1.7% contribution to annual growth.

We also had several key data prints for December which showed that on a year-on-year basis retail sales missed expectations but fixed asset investments and industrial production both beat market consensus. Meanwhile, trade data remained strong with the nation’s trade surplus hitting a record USD676.43bn in 2021; exports soared 30% higher in 2021 compared with the previous year, and in December alone exports were up ~21%yoy. China appears to be one of few countries where supply chain disruptions have been limited and has thus played an ever-increasing role in the global supply chain.

In a move which took markets by surprise, the PBoC cut its policy interest rate by 10bps to 2.85%, the first reduction since April 2020. The central bank also cut the seven-day reverse repo rate and injected CNY200bn additional liquidity into the banking system. Clearly policymakers are concerned about cooling growth, resulting from the indebted property sector, the broader regulatory crackdown on the likes of Tech, for example, and ongoing disruptions from the “zero-Covid” strategy. It is also evident that, in easing earlier than markets expected, the PBoC wishes to remain ahead of the curve, and position domestic markets ahead of the upcoming US hike, to limit volatility.

Interestingly, having begun development of its sovereign digital currency in 2014, China launched the e-CNY wallet application on January 4th to the greater public. On the 8th January the digital wallet was the most frequently downloaded free app across the China Apple iOS store, with over 2.5m installations. However, although the adoption rate has been rapid, the transactional use has been limited. The currency is only available in ten major “pilot” cities including those where the Winter Olympics events will be hosted and according to reports, many merchants do not currently accept the currency. The adoption of the digital yuan will clearly take some time to be broadly accepted; there have been reports that the nation may encourage government related bills, such as water & electricity, as well as medical costs to be paid in e-CNY.

The PBoC’s hope was that the app would be adopted by visitors to the 2022 Games, where Chinese authorities are looking to showcase the digital currency in an international setting. However, with the current “zero-Covid” restrictions fewer foreign visitors are expected to attend the events. Moreover, with reports suggesting that China has halted the sale of tickets to the general public, in favour of invitation only attendance, (red envelope) encouragement could be deployed to promote use of the digital yuan at the events.

Fixed Income Team