RMB Bi-weekly - RMB consolidates and near term focus shifts to U.S.

 |  November 16, 2017

• RMB takes direction from USD, but for now remains in consolidation mode.
• Foreign investments in Chinese assets registered record highs.
• FX reforms will likely take shape after the National People’s Congress.

USDCNH has been in consolidation mode at around 6.6400 since rebounding from 6.5860 at the start on November. Since the National People’s Congress last month, there hasn’t been a lot of market shattering news, but with the crucial developments in the U.S. regarding tax reforms, market participants have shifted their attention to the U.S. and are following the greenback and U.S. rates for direction.

While the People’s Bank of China (PBOC) has kept the RMB daily fixings relatively stable, the spot basis between the onshore and offshore markets have switched back and forth from +96 pips in favor of the onshore USDCNY rate to -210 pips against the rate over the last two weeks. Part of it was due to speculation as USDCNY traded higher ahead of Trump’s visit to China, but the market expected that the pair could come off after his trip, so USDCNH sold off in anticipation. However, when this did not materialize after Trump’s departure and USDCNY remained sidelined, short covering in USDCNH followed. This helped reverse the basis in favor of the offshore USDCNH rate by about 100 pips over the onshore market.

Turning to the U.S., the senate tax writing committee started work on its tax cut proposal this week, and the House may vote on its bill as early as November 16. The House Ways and Means Committee Chairman Kevin Brady says the House republican leadership is confident they have the votes to pass the tax bill. Thus far, the House has indicated that they are preserving the mortgage interest deductions for up to $10,000, while the Senate is planning to eliminate state and local tax deductions (including real estate taxes).

Foreign investments reached record highs
Foreign holdings of Chinese assets have grown for seven consecutive months with investments in onshore bonds and equities registering a new record of RMB 1 trillion ($150.6 billion) in Q3. Unlike the past three years where the RMB depreciated by an average of about 3 percent in the final two months of the year, the RMB has gained 3.1 percent year to date.

With the PBOC favoring a stable to stronger currency and having the means to control the RMB through fixings or interventions to contain excessive volatility, foreign investors are more confident about investing in China. With an appreciating RMB, foreign bond investors could potentially sidestep currency hedging costs. Also, Chinese corporates with stockpiles of foreign currencies overseas may be incentivized to bring money home. The increased flow into onshore assets has reduced outflow concerns from previous years that were caused by seasonal factors such as overseas dividend payouts, importer payments and individuals utilizing their $50,000 currency conversion limits before year end.

FX reforms
During the National People’s Congress, President Xi Jinping highlighted that the financial system must serve the real economy and he seeks to deepen reforms on interest rates and foreign exchange. With expectations for the RMB becoming more balanced, authorities are showing more tolerance for two way FX volatility. As such, we may see more reforms being introduced next year. The PBOC could gradually implement a managed FX floating system over a couple of years and allow the RMB to test the perimeters of the +/- 2 percent limit of the currency band.

Additionally, the PBOC’s Governor Zhou Xiaochuan has indicated that he wants to ease access for foreign investors to China’s financial markets. Therefore, the limits on shareholdings for foreign banks and constraints on certain types of business that they can engage with may be relaxed as well.

Source: Reuters, Bloomberg

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources.

About the Author

Market professional with over 20 years experience in FX and rates sales, trading and structuring. Provided coverage to clients in various business segments from corporates, Hedge funds, real estate investors and regional banks.
Now Let's Get Started

See how Silicon Valley Bank makes next happen now for entrepreneurs like you.

Connect With Us