China: PBoC announces measures to stabilize FX market expectations – UOB

Economist at UOB Group Ho Woei Chen, CFA, and Senior FX Strategist Peter Chia review the latest measured introduced by the PBoC.

Key Takeaways

“People’s Bank of China (PBoC) reintroduced the reserve requirement rule for banks’ forward sales of CNY by raising the required ratio back to 20% from 0%, starting from 28 Sep. This will increase the cost of FX purchases using forwards and thus reduce the incentive for bearish CNY bets and stabilising the FX market expectations.”

“This year, the central bank had also cut the reserve requirement ratio for foreign currency deposits (FC RRR) twice, by a total of 300bps. Of this, the latest 200bps cut to 6% took effect from 15 Sep. The series of steps are aimed at slowing the pace of CNY depreciation given a more aggressive Fed interest rate hike trajectory and weak growth prognosis in China.”

“Previous episodes where 20% risk reserve requirements were imposed in 2015/2016 and 2018 showed that it will not be enough to reverse the USD/CNY trend. The CNY will more likely continue to depreciate alongside other trading peers against the USD as the Fed is likely to continue its aggressive rate hikes in the coming quarter (4Q22). As such, we are of the view that USD/CNY is likely to sustain above 7.0 in the near future.”