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Friday, March 29, 2024

PBOC Strengthens Yuan Most In 3 Months As China Stocks Tumble After Holiday

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

With China returning from the Spring Golden Week holiday, it is catch-up time for the Yuan (notably higher against a weakening USD) and Chinese stocks (significantly lower – though not as much as some might have expected given China ETFs). The PBOC strengthened the Yuan Fix by the most since the first week of November, catching it up to the 15 handle strengthening in offshore Yuan since the pre-holiday lows.

The Yuan Fix is significantly higher…

As it catches up to the huge strengthening in offshore Yuan (thought note that CNH is being sold pretty hard as China opens)..

But it appears someone is not happy about the selling…

And equities are catching down to the rest of the world’s weakness…

But not as much as expected…

  • *SHANGHAI COMPOSITE FALLS 2.8% AT OPEN
  • *CHINA’S CSI 300 INDEX SET TO OPEN DOWN 2.5% TO 2,888.43

All this is happening just hours  PBOC Governor Zhou Xiaochuan broke his long silence to say there’s no basis for continued yuan depreciation… which is exactly what he would say after a capital outflow of $1 trillion in the past 18 months.

The nation’s balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, Zhou said in an interview published Saturday in Caixin magazine.

As Bloomberg writes, that’s an escalation in verbal support after such comments have been left in recent months to deputies and the central bank research department’s chief economist. Zhou dismissed speculation that China plans to tighten capital controls and said there’s no need to worry about a short-term decline in foreign-exchange reserves. The country has ample holdings for payments and to defend stability, he said.

“He’s desperately trying to make sure that all of his work in the past few years on capital liberalization does not go to waste,” said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. “He’s trying hard to instill investor confidence in the renminbi so that the Chinese government does not have to resort to the extreme measure of unwinding all of the progress on offshore renminbi in the past few years.”

The comments come as Chinese financial markets prepare to reopen Monday after the week-long Lunar New Year holiday. The weakening exchange rate and declining Chinese share markets have fueled global turmoil and helped send world stocks to their lowest levels in more than two years.

Here is DB’s Zhang Zhiwei with his own take on Zhou’s comment, according to which China will continue devaluing, but only after stability has returned to the market

We maintain our baseline forecast of USDCNY at 7.0 by the end of 2016. After revision, our probability forecasts for the USDCNY exchange rate are: 10% chance of CNY appreciation against the USD by the end of 2016 from its level of 6.49 at the end of 2015; 25% chance of CNY depreciation by 0-5%; 55% chance of 5-10% depreciation; and 10% chance of more than 10% depreciation.

These revisions are based on comments from an interview conducted with the PBoC Governor Zhou Xiaochuan, which was published on Feb 14 by the Mainland Chinese journal Caixin. We believe this interview is important, as it represents the first time the Governor has spoken about the FX policy since the depegging of the CNY against the US dollar on Aug 11 last year. It is also interesting that he chose to speak right ahead of the Chinese stock market’s reopening after a long holiday.

Here is the most important statement made by the Governor in the interview: “For a large country like China, the FX reform may need some time to be achieved. China tries to balance reform, growth, and stability. The global economy is still recovering from crisis. It also needs to balance reform, growth, and stability. We are pragmatic and patient. The ultimate goal is clear for us, but we don’t aim to go that direction in a single-minded way. We want to reform, but we also need to be a responsible economic power.” This is based on our translation of the original interview published in Chinese.

To us, this statement shows that (1) the PBoC is still committed to FX policy reform from a dollar peg to a floating regime in the long term; (2) the global financial market volatility has likely closed the window for now; and (3) the PBoC will likely stick to the dollar peg for now, and wait for the next window to float the currency.

We therefore believe the chance for a large devaluation in the short term has declined. The PBoC will wait for the next “window” to float the currency. A key consideration is the global financial and economic conditions.

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