China: Strong yuan helps build up of foreign reserves – ING

Iris Pang, Economist at ING suggests that they are slightly more positive than the consensus on the size of Chinese foreign reserves (INGF: $3,110bn; consensus: $3,095bn; prior: $3,081bn).

Key Quotes

“The stronger yuan is the dominant factor behind our expectation of higher reserves. Two factors have pushed the yuan stronger. One is market forces, the other is the PBoC’s daily yuan fixing.”

“Let’s see how market forces have pushed up foreign reserves. Companies, including exporters, and individuals which have accumulated USD because of its previous strength have started to convert their dollars into yuan. Those dollars enter foreign reserves.”

“Is this effect likely to be short-lived? No, we think it will continue and becomes selffulfilling. As the PBoC has successfully turned around yuan expectations from depreciation to appreciation, the market has followed, and pushed the yuan even stronger. With an even stronger yuan, the market would be more willing to convert dollar receipts into yuan, especially for companies that have continuous dollar inflows.”

“Another question is how long will the PBoC continue to fix the yuan stronger day after day? We believe that only once inflows are persistently higher than outflows, will the central bank slow down the yuan appreciation speed. We expect to see a small positive net inflow from August.”

“Looking at the longer term, we believe that the PBoC would like to keep the yuan appreciating, albeit at a slower speed, to keep net inflows positive. Our current forecast is 6.6 for the end of 2017.”