CNY: Would the PBoC change FX policy? - ING

Iris Pang, ING's Chief Economist, Greater China, provided her opinion on Friday's proposition of the Chinese central bank's official Lu Jinzhong that China should let the yuan appreciate to offset the rising costs of commodity imports.

"Regarding the PBoC comment to let the yuan rise to offset higher commodity import prices, my opinion is that it is possible for the PBoC to let the yuan move by itself in reaction to those PBoC comments. The market could push the yuan higher against the dollar, in effect, the market will be fulfilling the PBoC’s desire for a stronger yuan."

"But I wonder how much yuan strength, in terms of percentage gains against the dollar, can offset the high percentage increase in commodity import prices. The impact should be minimal. The Chinese government needs multiple tools to limit the increase in production costs brought about by higher commodity prices, which is partly due to expected US infrastructure projects."

"My view is that it will be very hard for USD/CNY to reach 6.10. Our existing forecast is 6.30 by year-end. The main risk of such a strong yuan is that it hurts exports, and as such, it hurts exporters and therefore producers in the same way as high commodity prices. Exports are still very important to China as the western world recovers from Covid.”