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10 Dec 2014
PBOC setting the CNY up for market forces - BBH
FXStreet (Guatemala) - Analysts at Brown Brothers Harriman ask why the PBOC is guiding the CNY fixing stronger?
Key Quotes:
Isn’t China supposed to be an example of a mercantilist economic model?
“And isn’t the country closer to a deflation threat (especially PPI) than inflation?”
“Isn’t there an economic slowdown in China?”
Yes, CNY spot has been weakening, but the PBOC has fixed USD/CNY lower this week, indeed at its lowest level since March. There are several possible reasons, here are several:
“(1) China will use this moment to establish the CNY as a reliable and stable currency on the world stage – as a medium of trade, investment and reserve accumulation”.
“(2) China wants to ensure foreign capital does not leave and, ideally, continues to flow in. This is part of a larger plan to deflate the shadow banking system by using more foreign investment as a partially substitute, as well as diverting money from the likes of trust funds to the official capital market (say, stocks and banks)”.
“3) The stronger PBOC fixings taken in tandem with weaker market rates (there is a 2% fluctuation band around the fixing) will allow China officials to repeat the mantra that it is allowing a greater role for market forces to determine the exchange rate”.
Key Quotes:
Isn’t China supposed to be an example of a mercantilist economic model?
“And isn’t the country closer to a deflation threat (especially PPI) than inflation?”
“Isn’t there an economic slowdown in China?”
Yes, CNY spot has been weakening, but the PBOC has fixed USD/CNY lower this week, indeed at its lowest level since March. There are several possible reasons, here are several:
“(1) China will use this moment to establish the CNY as a reliable and stable currency on the world stage – as a medium of trade, investment and reserve accumulation”.
“(2) China wants to ensure foreign capital does not leave and, ideally, continues to flow in. This is part of a larger plan to deflate the shadow banking system by using more foreign investment as a partially substitute, as well as diverting money from the likes of trust funds to the official capital market (say, stocks and banks)”.
“3) The stronger PBOC fixings taken in tandem with weaker market rates (there is a 2% fluctuation band around the fixing) will allow China officials to repeat the mantra that it is allowing a greater role for market forces to determine the exchange rate”.