PBoC reversed policies to avoid exchange rate overshooting - Natixis

Alicia Garcia Herrero, Chief Economist at Natixis suggests that they believe that the PBoC’s policy change is only to stabilize the short-term fluctuation of RMB.

Key Quotes

“The rapid appreciation of the RMB over the past months hit a snap last Friday (September 8th), with USDCNY thereafter slumped from 6.49 to 6.53 in five days. Before this, strong positive momentum has brought the currency up by 6% from the beginning of the year, and the trend only accelerated on August with CNY and CNH drastically appreciated by 2.03% and 1.94% in the month. Both CNY and CNH had already climbed beyond 6.5 and for the first time breaking 6.5 in the past 16 months, until the sudden trend reversal happened.”

“The key reason behind the sharp depreciation is the reversal of two policies. Effective from September 11th, the PBoC nulled the foreign exchange risk reserve ratio that required foreign institutions to deposit 20% of the value of the trades when buying dollars. In a separate move, the PBoC eliminated the required reserves for banks holding yuan deposits in Hong Kong and other oversea offshore centers. Both moves are to reduce transaction cost of shorting the currency. As such, onshore and offshore RMB slumped since the announcement made on last Friday and offshore forward rates jumped up.”

“That said, the sudden depreciation starting from last Friday was apparently driven by the PBoC’s policy, reflecting the government’s objective of stabilizing exchange rate before the Communist Party’s Congress on October.”

“We believe that the PBoC’s policy change was not to fundamentally alter the long-term trend of the RMB, but only to stabilize the short-term fluctuation. Due to the deteriorated trade balance and weaker economy, we still keep our view that the RMB will ease gradually in the longer term.”