Eco Policies, Commodity Volatility Add Mixed Moves to the Yuan
Fundamental Forecast for the Yuan: Neutral
- China’s Market News: Widened Yuan Spread Raises PBOC’s Concern
- China’s Market News: A Grand Shift in China’s Economic Policies
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The onshore Yuan (CNY) extended losses against the US Dollar on Friday after PBOC fixed the daily reference rate to the weakest level in two months, to 6.5246. The offshore yuan (CNH) rate fell this week on the US Dollar strength led by the better-than-expected US economic data. China’s ruling party newspaper issued headline commentary that revealed a major shift in China’s economic policies. This will likely affect the Chinese currency over the following periods. Also, volatility in China’s commodity and equity markets are seen highly increased this week, adding uncertainty to the direction of capital flows in China. In addition, as the spread between onshore and offshore Yuan rates has widened, the speculation is increasing that PBOC will intervene the currency market again as they did in late January.
The ‘authority’ said in the key commentary that China will not adopt a too loose monetary policy in the effort of stimulating the economy. The improved data in the first quarter increased market speculation that China was recovering led by stimulus, with 1Q New Yuan Loans gauge hitting a historical high record. This has been ruled out by the ‘authority’, as the country is still dealing with the side effects from the last stimulus such as overcapacity. A less-dovish monetary policy may leave less downward pressure on Yuan in the short-term. However, the ‘authority’ went on say that China’s economy will remain in L-shape for quite a while, and not just for one or two years. Thus, the slowing economy could eventually drag down the Chinese currency although it may take a while to happen. Over the coming periods, curbing price bubbles will be one of the main targets for the Chinese government. In fact, the government has already started to work on this issue in multiple areas.
First, banks’ lending has been tightened. The April New Yuan Loan gauge released on Friday fell to 555.6 billion yuan, well below forecasts. A measure of monetary supply, M2, missed expectations as well; the monetary supply grew +12.8% from a year ago, below the 13.5% consensus forecast by Bloomberg. This week the net cash withdrawal by PBOC through open market operations was 110.0 billion yuan. This is the third consecutive week that PBOC extracted liquidity from the market rather than adding it. Second, restrictions placed on the real estate sector have been tightened. After local governments introduced numerous of polices designated to reduce unsold homes, the housing prices rose sharply in the large cities and cities around them. The soaring prices increased market concerns on housing bubbles and in turn regulators revised the policies to cool down the volatility. Moreover, in the equity market, Chinese authorities banned cross-industry investments in virtual industries, as they have noticed rising risks in asset price bubbles in these industries. For the Chinese Yuan, it will be heathier for it to have an economy with less price bubbles.
Chinese commodities rode roller coasters this week. Major commodities plunged to the daily limit-downs on Monday. Then they diverged on Thursday: black commodities extended losses while crops jumped higher with soybean and rapeseed hitting the daily limit-ups. However, on Friday, soybean oil, palm oil as well as five black commodities, dropped to the daily limit-downs again. China’s commodity market is less developed than in US or other major developed countries; it is also less regulated compared to Chinese equity market. Such dramatic moves in the commodity market could lead to a meltdown in the near term. If it happens, the panic may drive capitals rushing out of the country, similar as it was seen early this year cause by the tumbling equities. This is a potential risk for the Chinese Yuan as a significant increase in capital outflows often drives the currency lower.
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