The speech by China's central bank governor was long, just like the gaps between his public appearances. He reaffirmed Beijing's intention to internationalise the renminbi, essentially excluding a competitive devaluation. The renminbi gained ground in response (see chart). He also offered reassuring comments on the prospect of tightened capital controls in the country, a step he considers irrelevant at this point.
The markets were further stabilised by Chinese credit creation, which rose sharply in January and fuelled optimism. Restated for seasonal effects, this figure is seen as a strong effort by the government to boost growth.
These two factors should provide short-term support, but we need to scratch below the surface to see what is really going on. Such high debt levels in China effectively limit the government's margin for error, ensuring that new loans go towards the most viable and promising projects. The real challenge facing China thus lies in not sliding backwards and simply financing state-run companies – which are not highly profitable and are largely in the manufacturing sector – rather than financing the services sector. We will return to the complex issue of Chinese debt in a future edition of Macro Highlights & Strategy.
In a change from recent weeks, some encouraging news – including developments in China and a potential freeze in oil output – placated investors and boosted the markets. And expectations that the European Central Bank would continue to ease monetary policy in March were further raised by Mario Draghi's comments.
Are these developments enough to buoy the markets in the coming weeks?