Digest Dec 2015 No9 : PBoC wants to guide the opinion of public in order to focus on the effective exchange rate
China house prices growth pick up pace
- Life may be returning to China's ailed housing sector as prices moved up steadily for seventh consecutive month. Prices in 70 cities surveyed up by 0.3% in November, after rising 0.2% in October. On yearly basis prices have recovered from deflation to up by 0.9% in November.
- Large chunk of the rises are due to price hump in Tier one cities. In capital Beijing up 7.7% from a year ago, while in financial hub Shanghai prices are up by 13.1%. While prices have jumped up solid in Tier one cities like Beijing, Shanghai, Guangzhou, Shenzhen, in some Tier three and four cities prices are in decline. Inventory still high in greater China.
- Nevertheless this recovery and stabilization is broadly encouraging, since the construction sector contributes about 7% to GDP.
- Some of the policy measures taken up, might be producing intended effect. People's Bank of China (PBoC) has cut rates six times in last 12 months and reduced down payment required for second house purchase thrice already.
- Further measures are likely to come in 2016.
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CNY likely to depreciate further?
Announcement of CFETS Index allowed China to publish its own currency index and also reinforces that the authorities are less emphasizing on USD/CNY movements and more on changes in CNY relative to China's primary trading partners.
China is indeed attempting to maintain relative stability in the NEER by allowing USD/CNY to move high.
Chinese authorities' decision to prevent further weakness of CNY seems to have waned off late, with USD/CNY fixings moving higher consistently.
New CNY NEER basket allows the authorities to avert the currency appreciation at a time when broad USD appreciation is expected, which is in line with USD/CNY rise.
"Indeed, we believe some of the depreciation in CNY/CNH recently likely reflected a degree of targeted pre-emption of general USD strength ahead of expected Fed rate hikes", says Barclays.
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PBoC attempts of stabilizing CNY – USD/CNY hedging perspectives
We reckon that the USDCNY exchange rate determination will indeed mirror an increasing reference to the NEER currency basket even if the PBoC has not explicitly committed to this.
The PBoC needs to guide public opinion to focus more on the CNY effective exchange rate against a basket of currencies rather than the bilateral USDCNY rate to assess the likely direction of the currency.
The Chinese central bank has reiterated that "it will maintain the CNY exchange rate basically stable at an appropriate and equilibrium level against a currency basket" on 14 December.
However, recent USDCNY movements appear to suggest some (trend) depreciation in the CNY NEER, in view of the previous strong NEER appreciation since mid-2014 (+15%), continued weakening growth, and persistent deflation risks.
On the external front, we also forecast USD/CNY weaker to keep pushing USD/INR higher, the INR may hang around 66 trajectories to control further its depreciation.
Hence, it is recommended to buy 3M USD/CNY forwards of march expiries.
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Recent USD/CNY movements suggest some (trend) depreciation in CNY NEER
China's central bank PBoC wants to guide the opinion of public in order to focus on the effective exchange rate of CNY versus a basket of currencies than the bilateral USD/CNY rate to assess the currency's likely direction.
"We think the USD/CNY exchange rate determination will certainly reflect an increasing reference to the NEER currency basket even if the PBoC has not explicitly committed to this", says Barclays in a research note.
PBoc has reiterated that ""it will maintain the CNY exchange rate basically stable at an appropriate and equilibrium level against a currency basket" on 14 December.
Nonetheless, the recent USD/CNY movements seem to indicate some depreciation in CNY NEER, regarding the previous solid NEER appreciation since mid-2014, continuous weakness in growth, and deflation risks.
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China's property market likely to weigh on economic growth in coming years
In China, November new house prices show continuous signs of stabilization driven by a pick up in big tier 1 cities. The country does not release a price index nationwide, but the prices likely rose.
The prices likely rose for the third straight month to 3.5% y/y from 2.4% previously. Tier 1 cities remain an outperformer with prices accelerating by 18.5% vs 16.2% previously.
Prices turned positive in Tier 2 cities for the first time in 15 months at 0.6 %. In Tier 3 cities, the prices contracted at a slower pace of -2.3 %.
"Despite the turnaround in property prices, we see little chance of this translating into a solid pickup in property investment. The overriding factor remains the destocking pressure in the property market arising from elevated housing inventories. As such, China's property market would continue to weigh on economic growth in the coming years", estimates Commerzbank.
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CNY on the path of further depreciation
The announcement of the CFETS index not only allows China to publish its own benchmark currency index (perhaps the start of an attempt to eventually rival the USD Index), but also reinforces the view that the authorities are placing less emphasis on USDCNY movements and more on changes in the CNY relative to the country's main trading partners.
The fact that the estimate of the CFETS NEER index puts its slightly more than 1% higher compared with the end of last year, after reaching a peak of 4.07% on 8 July 2015, suggests that China is indeed attempting to maintain relative stability in the NEER by allowing USDCNY to move higher.
Marking to events, 11 December 2015, the Chinese authorities' determination to prevent further CNY weakness appears to have waned recently, with USDCNY fixings moving consistently higher. Adhering to the new CNY NEER basket allows the authorities to avoid CNY appreciation at a time of expected broad USD appreciation. This is consistent with a rise in USDCNY.
Indeed, it is believed that some of the depreciation in CNY/CNH recently likely reflected a degree of targeted pre-emption of general USD strength ahead of expected Fed rate hikes. Moreover, focusing on the new basket may explain limited FX intervention recently and greater tolerance for CNY spot weakness as long as it does not diverge significantly from the NEER basket.
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