PBoC relaxes macro prudential measures on CNY - ANZ

The PBoC is reducing the reserve requirement for trading yuan forwards to 0% from 20%, noes   Khoon Goh, Head of Asia Research a ANZ.

Key Quotes

“The People's Bank of China (PBoC) is reported to be reducing the reserve requirement imposed on onshore currency forward transactions to 0% from 20%, effective today (11 September). This is not to be confused with the reserve requirement ratio for banks, which remain unchanged at 17% for major banks. In addition, onshore banks for cross border RMB settlements no longer need to establish a dedicated reserve account for withholding deposits placed by offshore banks. This requirement was introduced in January 2016 to restrict the liquidity outflows from onshore to offshore banks.”

“The authorities have not been actively seeking to stem the appreciation in the RMB this year. Despite China’s FX reserves rising for seven consecutive months by a total of USD93.3bn, these were all primarily due to positive valuation and income effects, as opposed to intervention. There was some attempt to use the counter cyclical adjustment factor (CCAF) in the yuan fixings to set it weaker when the currency was heading towards the 6.50 level. It is possible that the authorities may now be seeking to slow down yuan strength. Their focus has always been on RMB exchange rate stability and seeking to avoid one-way moves, be they in either direction.”

“Reducing the reserve requirement on forwards to 0% is one way to encourage market participants to hedge and thereby slow down the appreciation move. The fact that the authorities reduced it to 0% rather than abolishing it suggests that they want to retain some flexibility to adjust it if circumstances change.” 

“We will be paying close attention to the yuan fixings for further signals about the authorities’ tolerance with the currency’s strength. We suspect the PBoC is unwilling to directly intervene in the FX market, to avoid scrutiny by the US with the US Treasury semi-annual report due next month. Further relaxation of administrative measures could be used to get some two-way flows in the market.”

“The authorities have not been actively seeking to stem the appreciation in the RMB this year.”

“However, recent weaker than expected yuan fixings and this change to forward reserve requirement suggest the authorities may now be seeking to slow down yuan strength.”