China’s FX reserves and macro data to be closely scrutinized

Recent stability in the CNY is helping to stabilize other EM Asian currencies, although weak risk sentiment and commodity prices are exerting downward pressures on higher beta currencies such as the KRW, MYR and the IDR. Since China's FX policy change on 11 August, spot CNY has traded close to the daily fixing. 

However, this apparent success may have come at a heavy cost. While the daily USD/CNY fixings are more aligned to the previous day's close, the close itself appears not to reflect market forces fully.

"China worries have been dominating for the past few months and are unlikely to fade soon. August exports and imports growth is expected to slide further, to -9.0% and -8.5% y/y, respectively. but the trade balance is likely to widen to USD44.9bn. Taiwan, whose largest trading partner is China, is likely to see exports weaken further", forecasts Barclays. 

The present policy is not sustainable, given the associated costs in terms of FX reserves depletion and liquidity imbalances. As such, the CNY will need to depreciate further to stabilise capital outflows. China's August FX reserves will likely be released on 7 September and will be closely watched by the market to gauge the extent of FX intervention.

"Even India's export performance and industrial production are likely to remain muted, due to weak global demand. On price developments in China, PPI deflation is expected to deepen due to low commodity prices, while CPI is pushed up by pork prices", anticipates Barclays. 

FX intervention in recent weeks has been sizeable (~USD120bn), which has had a major cost in the form of domestic liquidity tightening and a consequent need to provide liquidity to sterilise FX intervention. 

"The money supply and credit growth report is likely to show M2 broadly unchanged, as capital outflows are largely being offset by domestic liquidity injections, while credit growth is likely expand after recent easing moves. The central banks of Korea and Malaysia are expected to keep rates on hold. The KRW and MYR will stay under pressures, given weak exports and CNY depreciation", added Barclays.