20180628-兴业研究-The_Re-Anchoring_of_Chinese_yuan_20页_1mb

The Re-Anchoring of Chinese Yuan Summary

Core Content

This report discusses the evolution of the Chinese yuan (CNY) exchange rate in the first half of 2018 and provides an outlook for the second half of the year. It highlights the factors influencing the RMB, including U.S. Dollar Index (DXY) trends, U.S.-China interest rate differentials, capital controls, and trade frictions.

Main Views

• Exchange Rate Trends: In the first half of 2018, the CNY showed resilience against the USD despite a rebound in DXY. The RMB appreciated against the USD, euro, and GBP, while depreciating slightly against the Japanese yen. The CFETS RMB index and other RMB indices continued to trend upward.

• Volatility: The annualized volatility of the USDCNY rate increased to 4.3%, though it remained lower than that of other major currencies.

• DXY and USDCNY Relationship: The DXY, which had fallen below the 91 support level, is expected to consolidate along a downward trend in the second half of 2018. The USDCNY is currently anchored to DXY and the U.S.-China yield spread. However, the role of DXY as an anchor is weakening.

• Interest Rate Differentials: The U.S.-China interest rate differential is a leading indicator for the USDCNY exchange rate, but recent deviations suggest the yuan has overshot to the upside. A correction is expected when DXY rebounds.

• Capital Flows and RMB Movements: China has relaxed capital controls, allowing more cross-border capital flows. This has increased overseas borrowing by domestic entities and boosted foreign investment in RMB-denominated assets, supporting RMB appreciation in the medium term.

• Capital Account Convertibility: Efforts to push forward capital account convertibility are expected to continue in 2018, further facilitating capital inflows and RMB strengthening.

• Trade Frictions: The U.S.-China trade war, including tariffs and export bans, has influenced the RMB exchange rate. The Chinese government responded with its own measures, including increased tariffs on U.S. goods, while the U.S. softened its stance on exchange rate manipulation.

Key Information

Exchange Rate Performance

• June 12, 2018 compared to December 29, 2017:
  • CNY strengthened by 1.7% against USD.
  • CNY strengthened by 3.1% against EUR.
  • CNY strengthened by 2.3% against GBP.
  • CNY weakened by 0.5% against JPY.

FX Policy Changes

• The PBOC removed the three-month capital lock-up requirement for QFII and RQFII redemption.
• The counter-cyclical factor in the USDCNY fixing formula became neutral.
• The PBOC introduced a 3% coefficient for the counter-cyclical factor in cross-border financing.
• SAFE relaxed restrictions on foreign investors and eased capital control measures.

Capital Flows

• Cross-border capital flows have become a key driver of RMB fluctuations.
• The yuan carry trade returned to a positive zone in June 2017, leading to increased offshore borrowing and foreign investment in RMB assets.
• Non-reserve financial account and errors and omission have become balanced and stable.
• Foreign currency-denominated bonds issued by Chinese companies, especially property developers and local government funding vehicles, saw a surge in issuance and maturity volume.

Outlook for 2H18

• DXY is expected to consolidate along a downward trend, potentially testing the 95 ceiling.
• The RMB may appreciate as the dollar index declines, but this is contingent on DXY turning around.
• The CFETS RMB index and CPI moved in the same direction in 2017.
• The current account surplus as a percentage of GDP leads the growth rate of the yuan's NEER by one quarter.
• The RMB NEER is expected to pick up slightly in 2H18, but the room for appreciation is limited.

Risk Factors

• Current Account Deficit: China experienced a current account deficit in Q1 2018, which could persist due to global manufacturing slowdown and increased domestic demand.
• Bond Defaults: Defaults in high-quality corporate bonds could reduce the attractiveness of RMB assets and put downward pressure on the RMB.
• PBOC Intervention: The PBOC may intervene to weaken the RMB if it appreciates too strongly.
• U.S. Yield Rise and DXY Rebound: Continued rise in U.S. bond yields and a rebound in DXY could pressure the RMB downward.
• ECB QE End: Early termination of ECB quantitative easing could also impact the RMB.

Summary of Key Events (2018)

Summary of FX Policy Shifts

Summary of Risk Factors

Conclusion

The RMB is likely to face appreciation pressure in the second half of 2018 as the dollar index trends downward. However, the appreciation may be limited due to the yuan's low exchange rate flexibility and the potential for DXY to rebound. The relaxation of capital controls and the push for RMB internationalization have played a key role in driving RMB movements, but risks such as current account deficits, bond defaults, and PBOC intervention remain. Overall, the RMB is expected to remain anchored to DXY and interest rate differentials, with a cautious outlook on its long-term appreciation.