Tim Condon, Chief Economist at ING, suggests that they think the Chinese authorities are convinced that the flows exerting CNY depreciation pressure are transitory and that exchange controls can curb it and expect them to cut policy interest rates in the current quarter. Key Quotes “Some of the record CNY 2.51 trillion of new CNY loans in January was seasonal. New loans typically bounce from a weak December level but this year’s bounce was outsized. It puts new loans on track to exceed the record increase in the first quarter of 2009 when the credit spigot opened to finance the CNY 4 trillion fiscal package that was the policy response to the Global Financial Crisis. Medium- and long-term loans made up 61% of new loans, which is about the average of the last two years (the stylized view holds that MLT loans finance real investment while short-term loans and bill financing finance financial investment). Mortgage loans grew by a record CNY 478 billion, and corporate loans, by a record CNY 1.06 trillion. New CNY loans dominated aggregate financing in January but there were a couple of other developments worth noting. Equity issuance was positive for a second consecutive month and, with CNY 455 billion of corporate bond issuance, brought capital market fund raising to a record CNY 602 billion. Shadow bank fund raising – entrusted loans, trust loans and banker’s acceptances – also increased for a second consecutive month. Banker’s acceptances were the big swing factor, which is surprising in light of their role in an insider embezzlement scandal in the Agricultural Bank of China – one of the Big Four – that came to light in January. Monetary expansion on the order of magnitude that occurred during the GFC would be expected to exert CNY depreciation pressure. It did then; in the first quarter of 2009 the NDF market was priced for a 2% CNY depreciation on a 1-year horizon. So far this year the CNH market pricing has been for a 4% depreciation on a 1-year horizon. Alongside the greater openness of the capital account today than in 2009, a repeat of the 2009-10 monetary stimulus would indicate to us that the authorities are convinced that the flows exerting CNY depreciation pressure are transitory – good capital flows – rather than capital flight, as PBOC Governor Zhou described in his Caixin interview. It also would indicate confidence that past and prospective tightening of exchange controls can curb CNY depreciation pressure. Finally, the light would be green for policy interest rate cuts. We reiterate our forecast of 50bp of cuts by mid-year (the Bloomberg median forecast is for one 25bp cut by mid-year). On the downside, a repeat of the 2009-10 monetary stimulus would diminish hope that a big bang monetary easing would include a clean-up of bank NPLs.” For more information, read our latest forex news.