China's State Council focuses on CNY stability

China's total foreign trade fell 6.9% y/y in H1 2015 caused the policy marker to revise the present trade policy. The State Council broughat a proposal in order to give more attention on stabilizing the currency movement and willing to widening of the CNY trading band

Commerzbank interprets the proposal and states, "The report first and foremost noted the need to keep CNY at a "reasonable and balanced level that is basically stable". In other words, the emphasis is still very much on currency stability rather than an imminent recommendation to widen the band which will see a knee-jerk spike in volatility. There were no further details with regards to the timeframe or size of the wider band if it were to happen." 

If the CNY band was to widen from the current +/-2% range around PBOC's daily fix, then Commerzbank see the following implications: 

• 1) A weaker CNY. The aim will be to improve export competitiveness. However, we are also cognizant of the fact that the weak export performance to date is a function of sluggish global demand rather than an over-valued CNY. As such, exports may not gain that much from a weaker CNY. 
  
  
• 2) Risks of increased capital outflows given perceptions of continued CNY depreciations and slowing growth prospects. The State Administration of Foreign Exchange (SAFE) reported last week that net foreign exchange purchases was a net selling of CNY 650 bn in H1 2015 vs net selling of CNY 384 bn in the same period last year. FX reserves fell by USD 149 bn in H1 2015 to USD 3.69 tn as opposed to an increase of USD 172 bn in H1 2014. Bloomberg estimates that net capital outflows amounted to USD 161 bn in Q2 2015 from USD 48 bn in Q1 2015. 
  
  
• 3) Excessive volatility will be clamped down. This will be consistent with China's drive to be recognized as a global reserve currency and inclusion in IMF's SDR basket.