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China's Market News: PBOC Tightens Monetary Policy through OMO in Late 2016

China's Market News: PBOC Tightens Monetary Policy through OMO in Late 2016

Renee Mu, Currency Analyst

This daily digest focuses on Yuan rates, major Chinese economic data, market sentiment, new developments in China’s foreign exchange policies, changes in financial market regulations, as well as market news typically available only in Chinese-language sources.

- The USD/CNH quickly climbed above 6.93 and 6.94 on Wednesday amid the Dollar strength.

- China’s Central Bank has been tightening monetary policy through open market operations.

- Yuan’s ranking in the global payments dropped one position to the sixth in October.

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Yuan Rates

The offshore Yuan has lost -338 pips or -0.49% against the U.S. Dollar as of 9:50am EST today, with the USD/CNH quickly breaking above 6.93 and 6.94. The Dollar strength is still the major driver: the DXY Index has gained +0.70% over the same span of time. In the onshore market, the Yuan extended losses against the Dollar as well: the USD/CNY rose +0.35% to 6.9140, the weakest level for the onshore Yuan since June 2008.

In the early Asian session, the PBOC weakened the Yuan by -125 pips or -0.18% against the U.S. Dollar.

Despite of the Yuan weakness against the Dollar, the funding costs of the onshore Yuan, from the overnight cost to one-year cost, have all been rising over the past ten days following Trump’s win in the U.S. Presidential election. We discussed that a weaker Yuan reduces the onshore Yuan supply through PBOC exchanging foreign currencies, and therefore, increases the borrowing costs of the onshore Yuan.

China's Market News: PBOC Tightens Monetary Policy through OMO in Late 2016

Data Downloaded from Bloomberg; chart prepared by Renee Mu.

Also, China’s Central Bank has been tightening monetary policy through open market operations. The regulator has been increasing longer-term borrowing over the past few months. In March, all the liquidity provided was through 7-day reverse repos. In April, the PBOC began to add medium-term liquidity through 3-month and 6-month Medium-term Lending Facilities (MLFs). In June, the regulator started to issue 1-year MLFs and continued to increase its weighing in the next few months. In August and September, the PBOC resumed 14-day and 28-day reverse repos to further increase lending terms, in the effort to curb the cheap short-term borrowing that were used to purchase longer-term bonds.

China's Market News: PBOC Tightens Monetary Policy through OMO in Late 2016

Data Downloaded from Bloomberg; chart prepared by Renee Mu.

Even though the Central Bank keeps the benchmark interest rates unchanged, the costs of borrowing from it have actually increased: The weighted average interest rate rose from 2.34% in August to 2.50% in October. In November, the rate fell slightly to 2.47% (as of November 23rd). The tweaked credit strategy is mostly driven by the rising risk of asset prices bubbles, which has been seen in multiple Chinese financial markets: first in the bond market, then the property market and the most recent commodity market.

In the 3Q Monetary Policy Implementation report, the PBOC mentioned for the first time that it will “pay attention to curbing asset price bubbles and preventing economic and financial risks”. With this prioritized target, we may see the regulator continue to implement the current monetary policy that is tighter than in early this year.

Market News

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

- Yuan’s proportion in the global payments dropped to 1.67% in October from 2.03% in the month prior, with its ranking falling one position to the sixth, according to SWIFT. Also, the Yuan slipped to the third most-active currency for global trade finance, holding a share of 4.61% and overtaken by the euro.

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

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