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PBoC Announces RMB Reform/Flexibility

Saturday, the PBoC announced it would proceed further with RMBexchange rate reform. While the precise timing was a bit of a surprise, many

expected a change in policy away from the CNY pseudo peg which had been in place

since late summer 2008 as the financial crisis approached its most intense stage and

China moved to stimulate its domestic economy. In true Chinese(We do what we

want when we want) fashion, the PBoC waited until rhetoric, particularly from the

U.S. faded. More interesting, however, is the recent path of USD/CNY non-

deliverable forwards.

USD/CNY Spot, 1 Month, 3 Month & 1 Year NDF

USD/CNY Spot USD/CNY 3M NDF USD/CNY 6M NDF USD/CNY 1Y NDF

Source - Datastream

As recent as the beginning of June, NDFs were trading near 2010 lows to spot pricing

in expectations of little change in CNY. NDFs have since, begun to price in more

expectation of appreciation as global risk-appetite increases. This was probably the best time for China to allow more flexibility

without rewarding hot money.

Significant sustained appreciation is unlikely. With considerable uncertainty surrounding the direction of developed countries,

the main concern for China, is inflation, and how to address it without tightening monetary policy.

n Focus:BoC announces return to exchange rate

exibility.

Philip Dunham

philip.dunham@davianletter.com

(985)789-5445

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China CPI (YoY%)

-12

-10

-8

-6

-4

-2

0

2

4

6

8

China CPI (YoY%)

Source - Datastream

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