China Watch A closer look at China’s currency moves
Group Economics Emerging Markets Arjen van Dijkhuizen, Roy Teo +31 20 628 8052,
13 August 2015 •
The PBoC’s recent adjustments to the exchange rate regime have caused quite some market turmoil worldwide.
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Still, they make sense as the de facto CNY peg to the strong USD was hurting competitiveness and not sustainable.
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We also think the authorities want to show commitment regarding liberalisation, with a view to the IMF’s SDR decision.
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We expect some more currency weakness, although the authorities will be constrained by several stability concerns.
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The moves help to support and reinflate the economy, but we expect easing to be stepped up should growth deteriorate.
PBoC adjusts fixing rate, triggering depreciation
background, ending the peg to the USD, currently one of the
After having tied the Chinese yuan closely to the US dollar
strongest currencies worldwide, looks quite prudent.
since March, the PBoC surprised markets this week by adjusting the USDCNY fixing by a cumulative 4.7% from 11-13
… and to show some commitment on liberalisation …
August. This adjustment triggered a 3.5% depreciation of the
Another main goal is to show commitment to further currency
yuan versus the US dollar so far. These developments had
liberalisation in the run-up to the IMF’s decision on RMB
quite an impact on global financial markets, leading to
inclusion into the SDR basket. The IMF recently indicated that
weakening equities and Asian currencies, but supporting
further liberalisation is needed, while hinting to postpone the
Treasuries and Bunds.
SDR decision to 2016. After the authorities had already announced financial liberalisation measures in early 2015, they
De facto CNY peg to USD has become ‘too expensive’
now show their preparedness to make the exchange regime
Indices, 2010 = 100
more flexible. Still, recent developments on the stock market
160
are a reminder of the fact that liberalisation efforts in China
150
often comes in the form of ‘two steps forward, one step back’.
140
Sometimes, the authorities come with short-term stabilisation
130
measures, running counter to longer-term reform goals.
120 110
… but there are also constraints
100
Meanwhile, the PBoC also faces constraints. The ‘stability-
90
oriented’ authorities will likely not tolerate too much CNY
80 08
09 10 REER (CPI-based)
11
12 13 JPY per CNY
14 15 EUR per CNY
Source: Thomson Reuters Datastream
weakness, as that may trigger more capital outflows and would raise the repayment burden of entities with high USDdenominated debts. It is quite early to assess how the authorities will weigh goals and constraints going forward.
Regime shift a step to restoring external competitiveness In our view, the PBoC’s surprising twist serves two policy goals. The authorities try to support and reinflate the economy
Taking into account the latest developments, we have changed our yuan forecasts to 6.55 per end-2015 and 6.75 per end-2016 (for more detail, see today’s EM FX Weekly).
by preserving export competitiveness. The poor export performance this year (with exports falling by 8.3% yoy in July) partly reflects the real effective appreciation of the CNY, which had been de facto tied to the USD since March. The CNY has become particularly strong vis-à-vis the JPY and the EUR, reflecting the BoJ’s and ECB’s unconventional QE policies. Exports to Japan and the EU contracted by 13% and 12.3% yoy in July. The real effective exchange rate has risen by almost 10% since the start of last year. Against that
Imports remain in contraction mode too Imports remained in contraction mode for the 9th consecutive month, falling by 8.1% yoy. While this weak number highlights domestic demand issues, lower commodity prices have once more affected import values too. Still, CNY weakening could be yet another factor in preventing Chinese imports from recovering. Meanwhile, China’s trade surpluses remain very high. Although capital outflows have risen since late 2014, we are still of the view that China’s external position is strong