In terms of policy interest rate, Deutsche Bank believes that the peoples Bank of China will raise the medium-term lending facility (MLF) interest rate twice in the second half of the year, each time by 10 basis points; if global economic growth accelerates, inflation and asset prices, especially real estate prices, the Central Bank of China may also raise interest rates earlier and on a larger scale.
On the credit side, the investment banks said Chinas credit environment is also likely to tighten. Historically, credit spreads have tended to expand during the monetary tightening cycle, and this is likely to happen again in 2021.
At the same time, inflation and house prices are equally noteworthy. According to Deutsche Bank, Chinas inflation may accelerate in the second half of next year, driven by rising domestic wages and the global economic recovery after the advent of vaccines; real estate demand has warmed up and may remain strong in the future.
Basically, Deutsche Bank predicts that Chinas inflation and house prices will be at a controllable level in 2021. With the help of timely and targeted tightening policies at the national and local levels, CPI growth will not exceed 3%, and house price growth will not exceed 10%.
With the manufacturing industry entering a new cycle of capacity expansion, the above-mentioned investment banks expect Chinas PPI to turn positive next year, and manufacturing investment is likely to increase. In particular, car demand is likely to remain strong next year, leading to increased investment by car manufacturers and upstream suppliers.
The prospect of low-carbon industry is good, and the investment in renewable energy (such as wind energy, solar energy) and clean transportation (new energy vehicles) and other related industries is expected to further increase.
In terms of RMB, Deutsche Bank believes that by the end of 2021, the RMB exchange rate against the US dollar will reach about 6.2, which means that the RMB will appreciate by 2% against a trade weighted basket of currencies.
Thanks to rapid economic growth and attractive returns on Renminbi denominated assets, the investment banks said Chinas foreign direct investment (FDI) and portfolio inflows will remain strong next year, or more foreign investment will enter Chinas manufacturing (such as automobiles) and services (such as finance) sectors.