China: Kuroda, Lagarde weigh on capital controls – ING

FXStreet (Delhi) – Tim Condon, Chief Economist at ING, suggests that they are reviewing their 16.00% year-end forecast for the RRR for upward revision with the latest being 17.50% while the Bloomberg median is 15.00%.

Key Quotes

“At a closing debate on the global economy at the annual World Economic Forum in Davos, BOJ Governor Kuroda said “[c]apital controls could be useful to manage [China’s] exchange rate as well as domestic monetary policy in a constructive way.” IMF MD Lagarde didn’t exactly disagree: “I think the massive use of reserves is not a good idea.”

PBOC officials prioritized CNY stability when managing liquidity according to the minutes of a meeting held last Tuesday, The Wall Street Journal reported. Assistant Governor Zhang Xiaohui was quoted as saying, “[c]urrently, we need to put a high emphasis on maintaining the renminbi’s stability when managing liquidity,” adding that an RRR cut would send “too strong an easing signal.”

The worry is justified in light of what happened after the October 23 RRR and policy interest rate cuts. The cuts widened the USDCNH premium to USDCNY and the USDCNH forward curve blew out like it did after 811.

The report also is consistent with the PBOC’s revealed preference for OMOs, MLFs and SLOs rather than RRR cuts for injecting liquidity to meet Spring Festival-related money demand. As of last Friday, the PBOC’s injections in January totalled CNY1.3tr (CNY545bn through OMOs, CNY612bn through the MLF and CNY150bn through SLOs), already above last year’s CNY1.1tr with two weeks to go before financial markets close for the holiday. We assume more will be needed to compensate for larger hot money outflows this year.

We are reviewing our 16.00% yearend forecast for the RRR for upward revision (latest 17.50%, Bloomberg median 15.00%. We expect tighter exchange controls and macroprudential measures to enable the authorities to defend US$3tr of foreign reserves while cutting interest rates and curbing CNY depreciation pressure. We reiterate our mid-year 6.72 USDCNY forecast (spot 6.56, Bloomberg consensus 6.65, NDF 6.75) and our yearend 6.60 forecast (Bloomberg consensus 6.70, NDF 6.86).”

Tim Condon, Chief Economist at ING, suggests that they are reviewing their 16.00% year-end forecast for the RRR for upward revision with the latest being 17.50% while the Bloomberg median is 15.00%.

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