RBS’ Chia Sees China Yuan Move as Market Liberalization Step

Chia Woon Khien, a strategist with Royal Bank of Scotland Group Plc. in Singapore, comments on the widening of the yuan’s trading band by the People’s Bank of China.

“The move should be seen as a market liberalization step and not a monetary policy move. Stated in the opening line of its notice, the PBOC justified the move as such: ‘‘Presently, China’s FX market is maturing. The market’s ability to price and manage risks is growing.” We will confirm this on Monday when we see how the PBOC fix the USD/CNY daily central parity. If they intend to have a monetary policy message, they would fix the CNY either stronger or weaker to reflect that intention.’’

“The move is a necessary step towards greater capital account opening, especially for the greater interaction between the offshore CNH and onshore markets. As the offshore market continues to grow, the PBOC needs to gradually remove the discrepancies between the FX regimes on both sides to minimize arbitrage gaps which will only attract speculative hot money.”

“If there is any policy implication from the move, it is that the PBOC is ready to relax its FX policy and let market forces dictate more of the direction for CNY.”

“In terms of net capital flows, this would be the net sum of the flows into both the offshore CNH and onshore CNY markets.”

“Given that the move is a very strong confidence booster for global investors, I would expect strong buying interests of CNH against USD in the spot and forward market on Monday opening. The USD/CNH forward curve has been steepening upwards in recent weeks due to the onshore demand for the cheaper offshore CNH funding as well as the global risk aversion.”

“We are already expecting to see fresh outright buying interests of CNH forwards to emerge to gradually counter the recent steepening in the USD/CNH forward curve.”

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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