Jiuzhou Secs: Yuan Market Reform Complete, PBoC Ended Intervention in June

Deng Haiqing of Jiuzhou Securities comments on the yuan and capital account reform and sees the end game in sight. First, makes a point about the forex reserves:

It is noted that the central bank's foreign exchange reserves means that the caliber of foreign exchange reserves, as long as the central bank does not sell the dollar against the renminbi , foreign exchange reserves will not change. In June, the yuan devaluation process, the central bank did not supply US dollars to the market, resulting in reserve assets will not reduce along with the exchange rate depreciation.

He goes on to explain the process of market reform, starting with interest rates, moving to currency and finishing with the open capital account. The end game, he says, is in sight:

Second, we speculate that the exchange rate market has unknowingly ending, "the interest rate market exchange rate market → → open capital accounts," the general policy of the path is already clear;

Reserves also increased because reserve bond holdings increased in value:

Thirdly, in reserve assets in the United States, Europe and other foreign bond price appreciation led to rise in central bank holdings of assets, while the yen against the dollar led to the sharp appreciation of the Japanese asset appreciation.

Deng says the PBoC may be finished with guiding the market:

First, the central bank may have completely exited foreign exchange market intervention normalization

June foreign exchange reserves greatly exceed investor expectations, in June, in order to calculate the mean, the depreciation of the yuan against the dollar is still 0.96%. This is quite different from the usual experience of the RMB exchange rate depreciation and foreign exchange reserves having identical declines.

...The central bank no longer act as providers of dollar liquidity in the foreign exchange market, so as to reduce dollar assets on the market, the yuan accumulation increased, which results in relatively long dollar exposure increased devaluation speed.

The PBoC taking its hand out of daily market moves is on the path of reform. It's a big step forward if true and important for the long-term. In practice though, Western and Japanese central bankers are intervening daily with extraordinary policy, so even if the PBoC ends the dirty float, it will still intervene for quite some time.

Next, the capital account may be opening.

Second, the exchange rate market reform has been quietly entering the final stage, the central bank "financial reform" only lacking capital account liberalization

Since February 2016, we observed two phenomena:

1, the central bank no longer directly controls the central parity of the RMB, the yuan central parity of the central bank announced the results roughly calculated that the second day of the yuan central parity depends on the "+ closing rate to a basket of currencies change" the previous day;

2, from the beginning of February, the central bank's foreign exchange reserves caliber changes significantly reduced, the overall change in foreign exchange reserves have been no more than 30 billion US dollars into the narrow fluctuation range, prove that the central bank in the number of normalized interventions ended.

Based on these two points, we guess, after the completion of marketization of the basic interest rate market, the exchange rate marketization may also have been quietly completed.

In the interest rate market, the central bank liberalized regulatory deposit and lending rates, while significantly enhancing control over money market interest rates, money market seven-day repurchase rate by the central bank reverse repo rate fluctuations within a narrow range;

In the currency market, the central bank does not interfere with the yuan central parity, withdraw the foreign exchange market intervention in the normalization of the exchange rate changes entirely to the market.

Of course, if the foreign exchange market to serious problems, such as devaluation is completely out of control, the central bank may intervene again, but this is not the norm of intervention, in line with international practice.

In this sense, we believe that the market interest rate and exchange rate market have been the perfect ending, the next step is to change the central bank capital account liberalization. The central bank's monetary policy reform path has been clear: "the interest rate market → → exchange rate market → → open capital accounts.

Finally, on the rise of reserves in June:

Third, the reasons for the increase in reserve assets: Asset revaluation effect

The central bank said exit normalization intervention exchange rate market is nearing completion twofold reason, can only explain why no foreign exchange reserves declined in June, but can not explain the rise in foreign exchange reserves. We believe that the main reasons for the increase of foreign exchange reserves that the asset revaluation effects.

On the one hand, the appreciation of the yen against the dollar far exceeds the depreciation of the euro against the dollar, which led to the overall rise in foreign exchange reserves;

On the other hand, bonds and other safe-haven assets in June, there has been a significant rise in asset prices pushed up overall assets held by the central bank.

All in all, in June turned up significant foreign exchange reserves from the central parity of RMB pricing mechanism and withdraw the foreign exchange market intervention in two ways, may mean that the Chinese central bank has quietly completed the exchange rate market-oriented reforms. Future changes in foreign exchange reserves may just be a revaluation of assets held by the central bank.

iFeng: 汇率市场化已悄然收官 下一步央行“金改”剑指何方