Conveying this via a note from ING on the yuan (onshore yuan is CNY, offshore is CNH).
- There has been some market speculation that the People's Bank of China may lift previous counter-cyclical measures in light of the recent strengthening of the RMB. This could include the removal of the 20% risk reserve on foreign exchange forward buying or maybe feature an increase in the foreign exchange deposit reserve ratio.
- This "speculation" comes from Premier Li's urging for a stable exchange rate and financial sector.
- The current USDCNY level at around 6.7 is around the middle of the range for the past five years. It may be a bit early to remove the risk reserve on FX forward purchases or any similar actions. 6.5 seems to be a more reasonable level. However, we cannot rule it out as the Chinese government wants the economy to recover smoothly during the reopening period.
- If there is anything that could hurt the economy at the moment, the government is likely to try to minimise the risk. Assuming the PBOC does remove the 20% risk reserve, we do not think that this will have a long-term impact on the RMB but there could be some short-term volatility in the FX market similar to the opposite operational impact we have seen during previous CNY depreciations.
USD/offshore yuan chart, daily
