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Repeats Story Initially Transmitted at 11:20 GMT Aug 7/07:20 EST Aug 7
--May Re-introduce Countercyclical Factor to Arrest Yuan Plunge
--Raising Required Reserve on FX Forward Signals More Active PBOC Role
BEIJING (MNI) - The People's Bank of China (PBOC) is expected to launch a
resolute defense of the yuan should the currency fall to test a key
psychological level against the U.S. dollar, sources close to the central bank
"If USDCNY rapidly reaches near 7.0, such volatility will have exceeded the
PBOC's comfort zone," a source familiar with the central bank's operations told
MNI. "While the PBOC hasn't stated it will defend a particular level, its
position is always to discourage expectations of fast depreciation, which may
trigger large capital outflow," the source said.
Others believe 7, as a level, will remain intact.
"The USDCNY likely won't break 7 at the present," Sheng Songcheng,
counsellor to the PBOC and an advisor to the Shanghai government, told MNI. A
sharp depreciation will further erode investors' confidence weakened by
China-U.S. trade conflicts and the slowing Chinese economy, he said.
On Friday, the PBOC announced a 20% reserve requirement on FX forward
purchases, effective Aug 6, seen as an attempt to curb the yuan's sharp
depreciation. Some analysts said this means the PBOC, no longer able to tolerate
a turbulent market, has activated the so-called countercyclical measures.
Raising the required reserves is only the bank's first step, said another
source close to the government. Should the yuan fall further, the central bank
can apply other tools, including reintroducing the countercyclical factor and
tightening capital controls, the source said.
The forex market has shown signs of "cyclical volatility" due to the trade
conflicts, and regulators may "conduct counter-cyclical measures when
necessary," the central bank said Friday after announcing to raise the costs of
trading forex forwards.
Following Friday's announcement, USDCNH dropped by about 500 pips. On
Monday, USDCNY closed 200 pips lower from Friday at 6.8420. However, the market
doesn't expect a long-lasting effect from the required reserve hike as the
yuan's weakening fundamentals remain.
"As yuan shorts increase, raising FX purchase costs is not enough to curb
the deprecation trend," another source said.
--NO DIRECT INTERVENTION
Thus far, the PBOC has not intervened directly in the FX market, as that
would reduce its forex reserves and its cultivated image of letting the market
decide the yuan's level.
However, sources said the countercyclical factor may soon be applied if the
CFETS RMB index, measuring the yuan against a basket of 24 currencies, continues
to weaken, as well as volatility of indexes monitoring capital outflows,
including forex reserves, forex positions and banks' forex sale, spike higher.
The CFETS index for last week was 92.69, a level since the PBOC introduced
the countercyclical adjustment factor in May, 2017. The PBOC will release other
forex data before mid-August.
The PBOC may have already tightened capital controls. China's official
outbound direct investment in June dropped 31.7% from May to $92.9 billion. The
Qualified Domestic Institutional Investors (QDII), a program allowing domestic
financial firms to invest in offshore markets, wasn't given new quotas in July
after three months of increases.
A weaker yuan can lessen the impact of the tariffs imposed on Chinese
exports by the Trump administration, a source said.
Guan Tao, the former Director-General of Balance of Payments at the State
Administration of Foreign Exchange(SAFE), a division of the PBOC, said the
worse-than-expected China-U.S. trade conflict sets the current round of
depreciation apart from that in 2015-2016.
"The conflict has intensified the volatility of market expectation, which
could trigger an overshot reaction and excessive panic," said Guan. "But if the
worst outcome (of the trade conflict) by the market fails to materialize, then
sentiment could reverse".
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