In recent weeks, there has been a concerted effort to support credit expansion by Chinese authorities, in addition to money market liquidity, notes the research team at Westpac.
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“The game changer has probably been the change of wording by the PBoC regarding its stance towards money market liquidity, from keeping liquidity “appropriate and stable” to keeping liquidity “appropriate and sufficient/ample”. Here, policies went beyond money market liquidity.”
“The authorities are preparing banks with higher capability to satisfy the demand for loans, as shadow banking activities continue to be compressed.”
“CNY rates have been falling since the start of the year, as expectations for a less-tight policy environment built in view of the downside risks to growth. The RRR cuts and trade tensions supported this expectation. The softening of stance towards liquidity and credit is sustaining the bullishness in the CNY rate and bond market.”
“The easing backdrop has contributed to CNY weakness, in addition to speculation that China may use FX as a response to ongoing trade tensions as China cannot easily match tariffs by quantity.”
“Our view remains that China is unlikely to deliberately weaken the yuan, being mindful of the capital outflows seen during 2015/16. The latest re-imposition of the 20% risk reserve requirement on banks’ FX forward sales business shows that the authorities are not comfortable with the recent pace of RMB depreciation.”
“The least the authorities want should be one-way depreciation in the yuan which leads to disorderly outflows. The June FX settlement data already suggests corporates might be becoming less willing to convert USD receipts to CNY. This is a situation authorities will closely monitor.”
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