MONETARY POLICY
Market was becoming too much one-way…
When analyzing the price action of the last couple of years, aſter the Yuan rise resumed, it can be said that the strengthening pressure has been - at least initially - genuine, since China has maintained, despite a substantial reduction over the years, a significant surplus in the balance of payments. In fact, to keep the speed of the rally in check, the PBoC has had to continually a c c u m u l ate reserves by buying USD/CNY.
Holders of Yuan have also been benefitting
from
some ‘carry’, in the order of a few percentage points, due to higher interest
rates Chart 1 - USD/CNY chart – courtesy of JP Morgan The currency move is
compared to the dollar (much less if you do not have access to the domestic market being a foreign investor). Such a steady trend was bound to attract interest and speculation over time by different sort of players such as hedge funds or local corporations and, as it oſten happens in such cases, to strengthen the perception that staying short USD/CNY was a trade with very low or even no risks involved. A recent
to change the
‘one way’ mindset, shake out speculators and introduce some volatility
situation was becoming extreme. Te big discrepancy between the Chinese reported exports from China to Hong Kong, and the Hong Kong reported imports from China to Hong Kong - China’s reports being consistently higher than Hong Kong’s - made reconciliation impossible several times in recent months. Te most reliable hypothesis
is that Chinese
estimate of JP Morgan believes that the long Yuan positions resulting from speculative activity could have reached around $ 750 billion (of which over 80% from local companies, and the rest from foreigners). Anecdotally, the phenomenon of exports’ over- invoicing has been like a wake-up call for policy-makers and a signal that the
FX
exporters keep declaring more than real exports to be able to sell as much as possible USD/CNY (there are rules that allow only currency transactions in the face of real flows of goods).
…which prompted reaction from the authorities
Te recent weakening of the Yuan, in just a few weeks, is significant, especially in a market with very low volatility, as the USD/CNY has experienced in recent years. But it would probably not be attracting much attention if it wasn’t for the fact
that it is an
implicit signal of the change of behavior of the central bank. Why are they doing so?
I think ‘new that
everything should be placed in a broader context. Te
rule’
under Xi Jinping is making a much more concrete attempt to rebalance the economy and create a more sustainable growth, while all efforts under the Hu Jintao guide were nothing more than a ‘facade’ push. Over the past 18 months, the greater determination to fight the excesses generated by years of tumultuous growth (financial leverage, real estate
FX TRADER MAGAZINE April - June 2014 19
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