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While CNY has generally stabilized against USD at end-2015 levels, China’s official RMB index declined by 3.6% during the same period. To a large extent, this is something the PBoC would like to observe – a stable USDCNY spot rate, while its currency depreciates against the basket of currencies.
This development is a effect of general USD softness. However, the market has also attuned projections and altered to a view that a large depreciation of CNY (more than 5%) can be discounted.
Boosted CNY Valuations: Despite the CNY’s appreciation in recent years, we do not regard it as overvalued as China has the huge share in worldwide exports that continues to improve, and China still has a robust current account surplus of 3% of GDP.
We believe that the USD performance will still dominate the movement of CNY in the foreseeable future, and USDCNY will remain generally steady for now.
Home sales have moved higher and inventories of unsold houses have come down. Consumption growth remains robust. After severe depreciation pressure, CNY sentiment has improved after China drew a line in the sand in January by pushing up CNH (offshore) money market rates.
We look for the PBoC to cut policy CNY rates over the next 3-6 months to ease the debt burden for Chinese companies and underpin continued robust growth in home sales.
PBoC on FX policy: Chinese central bank has made dual modifications to its policy over the last year that is functioning significantly, primarily, the daily reference rate has become more market based. Secondarily, the CNY is now explicitly managed against a basket of currencies rather than just the USD.
The above practice brings in the change in system that synthesized with havoc in equity avenue caused considerable confusion and capital outflows at the beginning of 2016.
However, capital outflows eased considerably in February and March and CNY has strengthened again versus the USD. While strengthening against the USD the CNY has weakened against the basket.
