Downside risks likely to CNY in near term

The PBoC announced on 11 August a move to improve the pricing mechanism of the daily fixing rate, with a reference to the previous day's closing rate as well as taking into account FX market supply-demand and other currency movements. 

Following two volatile trading days, the PBoC on 13 August reiterated that the new mechanism was a step forward towards a more market-determined exchange rate rather than a boost for exports. The press briefing suggests that the PBoC prefers stability after the initial shock, officials reiterated that "PBoC is able to maintain the CNY rate at a basically stable level".

"This new mechanism, if followed through, marks a revolutionary move towards improving the CNY exchange rate formation mechanism. However, a truly market-oriented exchange rate mechanism would mean CNY depreciation risks near term", says Barclays. 

On the debate over the motivation of the move, the government would like to reform the exchange rate formation mechanism to be more market-oriented, but at the same time there might be sizable depreciation given the weak growth and accumulated REER appreciation.