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China's Market News: PBOC: Dollar/Yuan Flexibility Will be Increased

China's Market News: PBOC: Dollar/Yuan Flexibility Will be Increased

Renee Mu, Currency Analyst

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- Both onshore and offshore Yuan rallied against the Pound following Bank of England’s rate cut and quantitative easing decisions.

- The PBOC released monetary policy for the second half of 2016 after presidents’ meetings.

- A financial platform designed for start-up companies showed little momentum amid policy uncertainty.

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China Finance Information: a finance online media administrated by Xinhua Agency.

- The offshore and onshore Yuan gained +0.81% and 0.80% respectively against the British Pound in the first hour following the Bank of England’s announcement of a rate cut and expanded asset purchase plan. The Yuan’s strength against the Pound could lift the CFETS Yuan Index, a trade-weighted index with 13 currencies including the Pound. This will contradict the PBOC’s exchange rate target: Maintaining the stability of the Yuan Index. In order to re-balance the Yuan’s position against the currency basket, the PBOC is likely to guide the Chinese currency lower against the US Dollar, as what was seen in the past.

- A research report on China’s monetary policy issued by the National Development and Reform Commission (NDRC) brought elevated volatility to Chinese markets on Wednesday. In the initial report published on the morning of August 3rd, it stated that China “should further cut reserve requirement ratios at a proper time”. This sparked Chinese investors’ speculation on a more loosened monetary policy and fired heated online discussions. However, in the afternoon, the statement was removed from the article. The change of tone may hint at two things: A) NDRC’s statement is not on behalf of the PBOC and B) the odds of the PBOC cutting rates in the second half of 2016 still remains low.

In fact, the PBOC has not cut the interest rate for 7-day reverse repos, which is a tool designated to adjust short-term liquidity; the interest rate for 7-day reverse repos remained unchanged at 2.25%.

The NDRC, formerly the State Planning Commission (SPC), is a state agency originally created for a planned economy. As China is moving towards a more market-driven economy, the NDRC has been restructured in the late 90s; with its main responsibilities now including the design of the national development plan, leading national projects and issuing reform plans for state-owned enterprises. The state agency used to cover fiscal and monetary policies when it was SPC. However, now the PBOC is the regulator to determine monetary policy.

Financial News: The news agency administrated by the PBOC.

- The PBOC hosted top-level meetings from August 2nd to 3rd. Presidents from the Central Bank’s local branches met and discussed monetary policies to be implemented in the second half of 2016. According the statement released after the meetings, the regulator will continue to adopt a moderate monetary policy and may make minor adjustments when needed.

In terms of exchange rates, the Yuan’s flexibility against the US Dollar will be increased and the Yuan will remain stable against the currency basket, according to the PBOC.

Also, the Central Bank said that they will continue to promote the Macro Prudential Assessment (MPA) system, which they use to guide the growth of credit. As we discussed yesterday, MPA is a tightened regulation on commercial banks and is part of the national plan to curb increasing risks.

China Finance Information: a finance online media administrated by Xinhua Agency.

- The number of listed companies on China’s National Equities Exchange and Quotations (NEEQ), also known as the “new third board, has increased to 8044 as of August 2nd. However, new third board indices have dropped since the beginning of this year. The NEEQ Market Making Component Index dropped to 1096.24 as of the close on August 3rd, the lowest level since February 2015.

NEEQ is designated as a financial platform for startup companies. Listed companies on the board have been split into two categories: basic and innovation. The latter are companies that can meet higher standards and are generally considered to be better opportunities for investors. Yet, the daily trading volume of the stocks listed on the innovation segment was only 300 million yuan, far smaller than the daily volume of hundreds billion Yuan in Shanghai and Shenzhen main boards. Uncertainty in regulatory policy is the main contributing factor to the low trading volume, according to Lianxin Securities.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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