China: Stronger CNY expectations boost reserves – ING

In China, stronger CNY expectations boost reserves with the stronger currency attracting capital inflows offsetting SAFE’s slight relaxation of capital outflows, explains Iris Pang Economist at ING.

Key Quotes

“We are more positive than the consensus on the trend of foreign reserves (INGF: $3,129bn; consensus: $3,110bn; prior: $3,109bn). Our optimism comes from the stronger yuan in October; USDCNY fell from 6.6528 on 29 September to 6.6320 on 31st October, and in between, USDCNY touched 6.65743 on the 10th. The strong yuan momentum is the dominant factor behind our expectation of higher reserves.”

“The main issue that could cause foreign reserves to fall might be the slight loosening of dividend remittances out of China. But we believe that the scale should be very small so that it would not reflect on the reserves after balancing off from inflow due to stronger yuan.”

“Despite the slight relaxation on outward remittances we do not see that becoming a bigger feature in the future as SAFE is still wary of capital flight. Preventing systemic capital flight risk is one of the key goals between now and 2020 as hinted at by the 19th Congress. SAFE would like to encourage the world to think that that capital outflows are not as problematic as in the past 12 months, and attract more inflows by hinting at ease of foreigners’ getting their money out in the future. But this is a difficult task.”

“Looking forward, if the CNY is as strong as we expect (INGF: USDCNY 6.50 by end 2017) then foreign reserves will continue to rise, and SAFE could relax slightly more in coming months. But just slightly, so that the net balance of foreign reserves would still show net monthly inflows.”