China: CNY appreciation supports uptrend in foreign reserves – ING

China’s September “data dump” starts today with release of foreign exchange reserves data and the consensus is forecasting an US$8.5bn rise on the month to US$3,100tr, according to Prakash Sakpal, Economist at ING.

Key Quotes

“The reversal of the CNY appreciation trend since September 11, the day the PBoC scrapped the regulation of banks’ reserve requirement for clients’ forward FX trading, is the factor behind the consensus of a smaller rise. The PBOC depreciated its daily CNY fixing against USD by 0.5% (month-end basis) in the last month. However, we think what matters here is the monthly average exchange rate movement. And on that basis, the fixing rate appreciated by 1.7% on the month - the most since the end of the pegged exchange rate regime in July 2005. The average market spot appreciated 1.5% in the last month.”

“According to our Greater China economist, Iris Pang, the short-term impact of the September 11 regulation change is a reduction in restrictions on banks’ dollar purchases, which should slow, but not end the CNY appreciation trend. Over a longer term, this is one element of liberalization of the forex market for CNY as it reduces costs for exporters’ forex hedging, which may be preparation for further liberalization of the CNY daily fixing mechanism.”