Long USD/CNH in 2017 – RBC CM

Research Team at RBC Capital Markets suggests that with evidence that the monetary transmission channel is impaired, the Chinese government has resorted to pulling on the fiscal levers, channeling liquidity into infrastructure investment.

Key Quotes

“To the extent this has allowed the government to achieve its growth target for 2016, it is a flawed strategy since it means further delay to economic rebalancing and raises the potential for yet more malinvestment. Ongoing state-driven infrastructure investment does not address China’s low productivity since employment in China is led by the private sector. Lastly, the scope for meaningful fiscal stimulus is lower than official budget figures indicate. An augmented budget deficit that includes off balance sheet and local government activity is ~8% of GDP already, much higher than the official budget deficit of 3.4%.”