Commerzbank’s Charlie Lay and Moses Lim highlight that the People’s Bank of China has removed the 20% reserve requirement on foreign currency forwards, reducing the cost of short CNY positions. They argue this likely aims to slow CNY appreciation even as USD/CNY and USD/CNH have recently fallen. The analysts stress that stronger CNY fits China’s long-term rebalancing, but the process will be gradual.

PBoC eases forward reserve rules

"The People’s Bank of China (PBoC) announced that it will lift the requirements surrounding shorting the CNY. Beginning on 2 March, investors will no longer be required to hold 20% of reserves on foreign currency forward contracts. As such, it will lower the cost of entering CNY short position."

"However, it is also likely that the change is aimed at slowing the pace of CNY appreciation. CNY has gained to the strongest level against the USD since April 2023. Although the current fixing rate suggests that PBoC is not against a stronger CNY, it may be cautious over a disorderly or overly aggressive appreciation path."

"Some have argued that a stronger CNY will be part and parcel of China's rebalancing and restructuring towards a consumption-based economy. This will improve the purchasing power of Chinese consumers and businesses. However, this is likely to take time and will also entail a rebalancing of national income, from businesses and state-owned firms to consumers."

"In FX, the onshore USD-CNY rose by 160 pips to 6.86 last Friday but fell by 420 pips for the week. The offshore USD-CNH rose 180 pips to around 6.86 last Friday but declined 350 pips last week."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)