CNY: Reversal of fortune - ING

Tim Condon, Research Analyst at ING, credit the People’s Banks’ CNY policy for the positive turn in sentiment towards China, which from our biased perspective was the most significant development for global financial markets this year.

Key Quotes

“It is hard to remember how bad things were at the start of the year. Uncertainty about CNY policy had investors in risky assets racing for the exit ahead of a feared China hard landing.”

“After three years of firefighting on the economic and political fronts, we think 2016 has been a year of transition. On the economic front, the first two years of President Xi’s administration was consumed by the need to deal with excesses of the 2009-10 credit boom – reining in shadow banking, reforming local government finances and cooling property market overheating. Last year the authorities had their hands full with the abovementioned double whammy. Finally, in 2016, they managed to get the fires under control. Earlier this year President Xi signalled a shift in economic policy from short-term stimulus to reform and his administration took first steps on what it identified as the “key tasks”: eliminating excess capacity, destocking, deleveraging, cost-cutting and regional development.” 

“The PBOC authorities have stayed the course during the Trump USD rally and we expect them to continue to do so for its duration, which on ING’s forecast will be through 1Q17. From 2Q17 when ING forecasts less intense DXY appreciation pressure we think political pressure from the Trump administration will dissuade the authorities from reverting to the policy of depreciate the CNY-NEER. Instead, our forecasts are based on the assumption that the PBOC continues to stabilise the CNY-NEER. Thus, we forecast CNY depreciating to 7.20 in 1Q17, then appreciating to 6.80 by year end.”

“However, stabilising the CNY-NEER could become more challenging in the event the DXY rally goes beyond what ING forecasts because significant CNY depreciation could trigger excessive onshore USD buying. Our best guess as to the policy response is tightened exchange controls. Beyond that, our best guess is that the authorities would shift from stabilising the CNY-NEER to stabilising CNY fixings, which they have done in past episodes of market turbulence.”