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China market and policy round up: trade tension reaches new height, FX reserves dip, record high QFII quotas granted in April

By Rebecca Feng
10 May 2019

In this round up, China-US trade tension peaked with US president Donald Trump’s market-moving tweet, Chinese FX reserves dipped in April and the amount of Qualified Foreign Institutional Investors (QFII) quotas approved in April surpassed that of all of last year.

The intensifying trade tensions between China and US dominated market headlines this week.

On Sunday evening, Trump tweeted that he would lift the existing 10% tariff on $200bn imported Chinese goods to 25%. He also vowed to impose a 25% tariff on all of the remaining $325bn Chinese goods that have not yet been taxed.

The tweet came days before China sent its premier Liu He to Washington DC to continue the 11th round of trade talks.

On Monday, US trade representative Robert Lighthizer confirmed to reporters that the 25% tariffs would go into effect on Friday. He also accused Beijing of reneging on trade commitments.

“Over the course of the last week or so we have seen an erosion in commitments by China,” Lighthizer said on Monday. “Really, I would use the word reneging on prior commitments.”

On Tuesday afternoon, China’s Ministry of Commerce said in a statement that Liu He, the country’s vice premier, would still be heading to Washington DC on May 9 and May 10 for the planned trade talks, defying previous rumours that the trip might be cancelled.

State media Xinhua said in an editorial piece on the same day that “in terms of the China-US trade war, China has always been unwilling to fight, not afraid to fight, and will fight when it is absolutely necessary”.

On Wednesday, Reuters reported, citing sources, that China sent a diplomatic cable to the US last Friday in which it deleted the parts about its commitments to change laws in order to resolve core US demands from all seven chapters of the draft deal.

On Wednesday evening Beijing time, the Office of the United States Trade Representative filed a draft plan with the Federal Register for increasing tariffs.

On Thursday morning, the Chinese Ministry of Commerce said that China “deeply regrets” the US’ decision to increase the tariffs and “will have to take necessary countermeasures if the tariffs went into effect”.

On Friday morning Beijing time, Trump said he had received a “beautiful letter” from Chinese president Xi Jinping. The tariffs on $200bn of Chinese goods were officially increased from 10% to 25%, alongside the ongoing trade talks in Washington DC.

Soon after, the Chinese Ministry of Commerce issued a third statement confirming that it would take retaliatory measures.


China’s FX reserves fell by $3.8bn to $3.1tr in April, the first drop after six consecutive months of increase, according to a Tuesday statement by the State Administration of Foreign Exchange (Safe).

Wang Chunying, the spokesperson of Safe, attributed the decline to a stronger US dollar and the changes in global assets prices.


In April, Safe approved a total of $4.2bn QFII quotas and Rmb9.7bn ($1.43bn) Renminbi Qualified Foreign Institutional Investors (RQFII) quotas.So far this year, $4.74bn of QFII quotas have been approved, more than the amount approved in the entirety of 2018, Safe announced on Monday evening.

The new QFII holders are Nomura Asset Management, Nomura Singapore Limited, Deutsche Bank Aktiengesellschaft, Nikko Asset Management, Merrill Lynch International, Société Générale, Macquarie Bank Limited, MUFG and Asset Management One.

The new RQFII holders are Cephei Capital Management, Zeta Capital, PICC Asset Management, Amundi Hong Kong Limited and the International Monetary Fund.


China’s exports contracted by 2.7% year on year in April, in sharp contrast from March’s 14.2% growth, according to data published by the Ministry of Commerce on Thursday.

Imports grew 4.0% year on year, a significant increase from the 7.5% contraction in March, after four months of decline.

As a result, China’s trade surplus narrowed to $13.84bn in April from the previous month’s $32.67bn.

Both imports and exports from and to the US were weakened by the ongoing trade tensions. China’s exports to the US contracted by 13.1% year on year and imports from the US contracted by 25.7% in the same period.

“Given recent policies to stabilise infrastructure investment and support the private sector, overall import demand may still pick up in the coming months on the back of higher domestic demand, but a challenging global trade environment means overall import growth could remain modest in 2019,” Jingyang Chen, an economist at HSBC, wrote in a Wednesday note.


Aggregate financing grew 10.4% year on year in April to Rmb209.68tr, down from the 10.7% growth in March, according to data published by the People’s Bank of China (PBoC) on Thursday morning.

Renminbi-denominated loans reached Rmb141.85tr, a 13.5% year on year increase, slightly down from the 13.8% year on year increase in March.

The volume of outstanding corporate bonds and local government special purpose bonds increased by 10.5% and 41.4% respectively.

“Weakness in April money and credit data is likely the result of an intentional change in policy stance toward a less supportive one, as reflected in the less dovish monetary policy, after activity growth, as well as an inflation and equity market performance rebound in 1Q,” Yu Song, China economist at Beijing Gao Hua Securities, wrote in a Thursday note.


CPI was up 2.5% year on year, reaching the highest level in six months. The increase was led mostly by the 6.1% growth in food CPI, according to data from the National Bureau of Statistics. Non-food CPI rose 1.7% in April, versus the 1.8% growth in March.

Producer price index (PPI) was up 0.9% YoY, up from 0.4% in March.

“We believe the rise of CPI inflation to impose little pressure on the PBoC’s easing bias because annual CPI inflation could still be around 2.5%, well below Beijing’s target of 3.0%, and the rise of CPI inflation is being driven by a surge in pork prices as a result of a supply shock,” Ting Lu, an economist at Nomura, wrote in a Thursday note.


Average daily trading volume of USD/CNH Futures on the Hong Kong Exchange and Clearing (HKEX) reached 6,053 contracts in April, a 31.5% drop from March’s 8,835 contracts, the exchange said in a monthly statement.


Average daily trading volume of Chinese bonds via the Bond Connect channel increased 6.1% month on month in April, and by 33.2% to $0.7bn year on year, according to a monthly report by Tradeweb published on Wednesday.

By Rebecca Feng
10 May 2019