Insightperspectives January 1, 2016 v3

Insight Perspectives

17. In December, this prediction was supported by the

PBoC saying that

the foreign exchange market needs to follow the trade-weighted

real exchange rate index

( CEFTS )

rather than only the yuan exchange rate

against the US dollar. In this context, the yuan could

depreciate more sharply against the US dollar if

Insightperspectives proves right that the euro will hit

parity against the US dollar.

In 2016, Beijing will be walking a tightrope. Adding

more liquidity to the domestic economy requires that

Beijing eases capital control more aggressively as the

central bank no longer will need to intervene to

support the currency, at least not to the same extent as

in the past. On the other hand, easing capital control

may animate more Chinese capital to move abroad,

which could endanger price stability in the housing

market.

At present, howevever, the housing market is not yet at

risk as capital control remains relatively tight. Last

month, this was also reflected in a house price report

from the National Bureau of Statistics (NBS). In

November, the

leading newly-built house price index (70-cities)

continued to increase 0.3% month-on-

month, according to Insightview’s population-weighted

calculation (click

here

to see an updated price chart).

House prices rose 1.2% compared to the same month

in 2014. In China, house prices see support from the

fact that new supply entering the market has declined

sharply since late-2014, at least this is the case in tier-1

and to some extent tier-2 cities. This has not only

closed the gap between demand and supply, but new

supply has declined below new demand.

Since until recently, the general view in Beijing was that

supply needs to adjust to solve China's economic

imbalances. In this context, it is interesting that

President Xi Jinping has now become a devotee of

“ supply-side economics ”

, which is also something

Beijing has done nothing to disguise in the media. In

December, state-sponsored newspapers told their

readers that China needs policy measures similar to

what Ronald Reagan and Margaret Thatcher launched

in the 1980s – read the China Daily article,

Xi leads shift from Keynesianism to 'supply-side' economics .

If supply-side economics is the new game plan, this

should be supportive to the Chinese stock market as

this will allow market forces to play a bigger role – read