20180807-兴业研究-When_the_PBOC_will_Re-adopt_the_Counter-cyclical_Factor_in_CNY_8页_1mb

When the PBOC will Re-adopt the Counter-cyclical Factor in CNY

Core Content

The document discusses the potential re-introduction of the counter-cyclical factor in the USDCNY exchange rate fixing mechanism, which was previously introduced by the People's Bank of China (PBOC) on May 26, 2017. This factor was used to counteract excessive one-way movements in the RMB exchange rate and to align it with broader market conditions. However, since early 2018, the PBOC has suspended its use, and the report analyzes the conditions under which it might return.

Main Points

• Introduction and Suspension of the Counter-cyclical Factor:
  The counter-cyclical factor was introduced in 2017 to hedge against pro-cyclical market sentiment and prevent RMB from overshooting. It was suspended in early 2018, and the PBOC has not intervened in the FX market since then despite continued RMB real effective exchange rate (REER) strengthening.

• Impact of the Factor:
  The factor helped stabilize the RMB by adjusting the daily fixing rate in response to divergences between the USDCNY rate and the US-China yield spread, as well as the DXY (Dollar Index). It was effective in reducing the spread between the USDCNY close and midpoint, aligning market expectations with the broader trend.

• Current Conditions and Analysis:
  As of July 19, 2018, the divergences between the USDCNY rate and the yield spread, and between the USDCNY rate and the DXY, remained within the previous bands. This suggests that the PBOC does not currently need to reintroduce the counter-cyclical factor.

• Depreciation Expectations and Forward Premium:
  The report notes that there are renewed depreciation expectations for the CNY, reflected in the option market and the widening CNH-CNY spread. However, the USDCNY forward premium has been narrowing since 2017, indicating that expectations for further depreciation are not extremely strong.

• Re-introduction Conditions:
  The PBOC may reintroduce the counter-cyclical factor if the RMB exchange rate moves outside the current trading range, particularly when the USDCNY rate reaches between 6.94 and 7.20. This would indicate a significant deviation from the expected trend, prompting the need for intervention.

Key Information

• Counter-cyclical Factor Purpose: To prevent excessive one-way movement in the RMB exchange rate and align it with market sentiment and yield spreads.
• Suspension Period: Early 2018 onwards.
• Market Indicators: DXY, US-China yield spread, CNH-CNY spread, and forward premium are key indicators analyzed.
• Trading Range: The RMB's nominal effective exchange rate (NEER) is pegged to the CFETS RMB Index, with a moving band that expanded from +/-1.6% to +/-4.3% in 2018.
• Re-introduction Trigger: The factor will likely return only when the USDCNY rate moves outside the current trading range, specifically reaching 6.94-7.20.

Conclusion

The PBOC is unlikely to reintroduce the counter-cyclical factor in the near term due to the current alignment of the USDCNY rate with market trends and the relatively modest depreciation expectations. However, if the RMB exchange rate deviates significantly from the established range, the PBOC may consider bringing it back to stabilize the currency.