UOB Group’s Economist Ho Woei Chen, CFA, and Senior FX Strategist Peter Chia, review the latest decision by the PBoC.

Key Takeaways

“In a statement on Mon (5 Sep), the People’s Bank of China (PBoC) said the reserve requirement ratio for foreign currency deposits (FC RRR) will be reduced to 6% from the current 8% with effect from 15 Sep. This is the second FC RRR cut this year, following a 100bps reduction that took effect on 15 May.”

“Given the outstanding foreign currency deposits of about USD0.95 tn, the 2 percent point cut in the FC RRR is estimated to increase liquidity by around USD19 bn.”

“With the increasing headwinds in China, the PBoC will need to maintain an accommodative monetary policy and a proactive fiscal policy to support the recovery. Chinese officials said on Mon (5 Sep) that the government will accelerate its stimulus rollout in 3Q22. Policy priority will remain on stabilising the economy as well as preventing sharp depreciation to the CNY ahead of the 20th Party Congress that starts on 16 Oct. To further stem the depreciation, the PBoC may also increase offshore bill issuance to absorb the CNH liquidity.”

“The latest move is unlikely to be a game changer for the current bout of CNY weakness. We reiterate our current set of USD/CNY forecasts which are at 7.00 in 3Q22, 7.05 in 4Q22, 7.08 in 1Q23 and 7.10 in 2Q23.”