Frances Cheung, head of macro strategy at Westpac, points out that China stays on the monitoring list of US Treasury’s semi-annual report on the macroeconomic and FX policies of major trading partners as expected after having met one criterion (bilateral trade surplus with the US) by a wide margin.
Key Quotes
“While the US Treasury report failed to find evidence on direct FX intervention (to weaken the RMB), it accused China of the “persistent and widespread use of non-tariff barriers, non-market mechanisms, state subsidies”¦leading to a wider trade surplus”.”
“Our view remains that what the Chinese authorities would least like to see is uncontrolled capital outflow.”
“China has shown its willingness to stabilize its currency. Officials have stepped up efforts in guarding against RMB depreciation recently, and these efforts include verbal intervention, strong RMB fixings compared to basket movements, and potential tightening of offshore RMB liquidity.”
“There is a need to attract capital inflows to make up for the slack on the trade side. A stable RMB is key to retaining foreign interest in CNY assets, and as such is desirable from a policy perspective. Changes in the position for forex purchase on the PBoC balance sheet have been small in recent months, and they were negative suggesting sales of dollars.”
“The RMB is under depreciation pressure because of the downside risk to China’s growth, and the volatile risk sentiment. That said, onshore sentiment towards the RMB has remained anchored, with no obvious outflow pressure, for now.”
“The flow backdrop combined with China’s intention to guard against rapid RMB depreciation is likely to cap USD/RMB for now. Key levels to watch are 6.93 and 6.98. The flow picture can change swiftly and we should monitor it closely.”
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