25 Feb 2016
China to allow CNY to become mkt determined - Nomura
Analysts at Nomura explained that the Chinese government will likely reiterate the need for market reform of the CNY exchange rate system at the NPC.
Key Quotes:
"We believe authorities will gradually allow the CNY FX rate to become more market-determined this year amid occasional FX market interventions (such as by managing the fixing and directly intervening through buying/selling) to dampen speculative positioning.
Indeed, in his 14 February interview with Caixin, PBoC Governor Zhou said that “the process of RMB internationalisation will move forward like waves”, and qualified that “if speculation becomes the key problem in the foreign exchange market, we’ll emphasize on dealing with speculation”.
However, the concern over such intervention stem from the potentially rapid drawdown of FX reserves. There are some in the market who believe that a one-off large devaluation would cool CNY depreciation expectations and avoid a large decline in FX reserves, but we believe this is unlikely in coming months, as it would be too costly from both a political and, to some extent, an economic perspective.
In addition, we believe China’s FX reserves remain adequate to hold the RMB stable in coming months. Rather, we think increased supervision to prevent the abuse of capital flow channels is more plausible, and believe the PBoC would even consider capital account controls, if it loses control over capital flight (the PBoC has recently tightened measures on RQDII and ODI, among others).
That said, we do not think the PBoC will return to a mandatory FX settlement system unless faced with a severe capital flight situation. Indeed, Governor Zhou also commented that “any inappropriate control will cause inconvenience and disturbance to the real economy and trade, potentially undermining confidence and international payments. Moreover due to the high degree of openness, market participants can usually circumvent controls.”
Key Quotes:
"We believe authorities will gradually allow the CNY FX rate to become more market-determined this year amid occasional FX market interventions (such as by managing the fixing and directly intervening through buying/selling) to dampen speculative positioning.
Indeed, in his 14 February interview with Caixin, PBoC Governor Zhou said that “the process of RMB internationalisation will move forward like waves”, and qualified that “if speculation becomes the key problem in the foreign exchange market, we’ll emphasize on dealing with speculation”.
However, the concern over such intervention stem from the potentially rapid drawdown of FX reserves. There are some in the market who believe that a one-off large devaluation would cool CNY depreciation expectations and avoid a large decline in FX reserves, but we believe this is unlikely in coming months, as it would be too costly from both a political and, to some extent, an economic perspective.
In addition, we believe China’s FX reserves remain adequate to hold the RMB stable in coming months. Rather, we think increased supervision to prevent the abuse of capital flow channels is more plausible, and believe the PBoC would even consider capital account controls, if it loses control over capital flight (the PBoC has recently tightened measures on RQDII and ODI, among others).
That said, we do not think the PBoC will return to a mandatory FX settlement system unless faced with a severe capital flight situation. Indeed, Governor Zhou also commented that “any inappropriate control will cause inconvenience and disturbance to the real economy and trade, potentially undermining confidence and international payments. Moreover due to the high degree of openness, market participants can usually circumvent controls.”