China: Strong CNY enables foreign reserves to rise - ING

Iris Pang, Economist at ING suggests that they are in line with consensus in forecasting another rise in Chinese foreign reserves in July (INGF: $3,072bn; consensus: $3,075bn; prior: $3,057bn) as the data are due on Monday, August 7.

Key Quotes

“The main reason behind our thought is accelerated CNY appreciation and weak USD in July. We believe a 0.8% appreciation on month is enough to change market expectation of the CNY trend from depreciation to appreciation. Such change in expectation is likely to slow down capital outflows, which will reflect in bank clients selling less CNY to banks for forex in July. We also believe the valuation effect from strong EUR pushed up the foreign reserves number.”

“Although market expectation has changed, this doesn’t mean regulators will relax administrative measures on capital outflow for the rest of 2017. After the media reported that the banking regulator has looked into mega cross border deals about a month ago, recently the media said that SAFE, the regulator that set policies on foreign currencies businesses, is checking whether those deals followed legitimate processes on getting onshore guarantees for offshore loans. More, the Ministry of Finance issued a circular on 1 August laying out due-diligence requirements for SOEs corporates under central and local governments to plan and monitor cross border investments, and to evaluate investment returns of those investments.”

“These intensive actions from different regulators send strong signal that the government’s view on investing abroad would become more selective. Investments in line with the central government’s reform direction could get a pass easier than property development and projects targeting leisure consumption. Overall, we keep our view that China’s investment abroad would experience extended slowdown.”