New PBOC Governor Rules Out Currency Depreciation In US-China Trade War

While the entire world was transfixed on the speech from China's president Xi Jinping on Tuesday morning at the Bo’ao Forum, which sent futures surging due to its allegedly, if erroneously, "conciliatory" note, far fewer paid attention to the new PBOC Governor Yi Gang, who today spoke at the same forum on monetary policy and further opening up of the financial sector. Unlike Xi's speech, which was was repeat of what Xi said in Davos in January, Yi' speech was far more important as it actually unveiled Chinese strategy in the context of currency wars.

First and foremost, Governor Yi stated for the record that the Chinese currency will not be used in a trade conflict. While there had been several recent media reports about China looking into this possibility, most recently from Bloomberg, Goldman notes that factors that support a view that adoption is unlikely include:

  1. An active CNY depreciation would risk further escalation of trade tensions, and the senior leadership, including President Xi, has been generally conciliatory; it's easier to justify direct quid pro quo tariffs as a countermeasure to tariffs imposed by the US.
  2. Depreciation has debatable effects on trade; many officials do not believe exchange rate changes are that effective in supporting export growth.
  3. Given the experience of 2015-16, the risk of self-fulfilling depreciation could be on policymakers' minds.
  4. Actively managing the CNY weaker would be awkward after the government has commented extensively that it is no longer actively managing the exchange rate. We believe this is especially the case after Governor Yi’s recent promotion as he is a strong believer of a more market-based way to manage the economy.

Governor Yi's statement does not mean that the RMB will not depreciate against the dollar, but just that China will not actively intervene in the market to use currency as a tool during the conflict. Indeed, if the broad dollar strengthens, Chinese policymakers might be happy to see it as there has been a growing sense the the RMB has been moving too much in one direction against the dollar.

Separately, Governor Yi also released more details on the opening of the financial sector, both in terms of the sub-sectors involved as well as the timing (in some cases) which was helpful in supporting the broad directional statement from President Xi earlier (see details in our note here). These mainly include:

  1. Expand SH-HK stock connect daily quota (northbound to Rmb 52bn from Rmb 13bn, southbound to Rmb 42bn from Rmb 10.5bn), effective May 1; aim to implement London-HK connect before end of this year;
  2. Over the next few months, eliminate restrictions on foreign investments in banks and financial asset management companies; allow foreign banks to set up branches in China; increase the upper limit on foreign investment in brokers and funds to 51%, and eliminate this upper limit after 3 years;
  3. Before the end of this year, encourage foreign investments in trust, financial leasing, auto financing and consumer financing industries. Other ministries including MOF will likely announce more details on tariff cuts soon.

Also of note: the new Chinese central bank head mentioned that benchmark interest rate will be mainly decided by the market in future, and the two-track interest rate system (benchmark interest rate and market interest rate) will be merged to a one-market interest rate system. Governor Yi also mentioned that the interest rate spread between China and the US is “comfortable”. To be sure, analysts agree that there is no need to raise interest rate meaningfully in the near term, given: 

  1. the uncertainties related to the trade conflict,
  2. today’s downside surprise on CPI and PPI inflation data,
  3. likely downside surprise in March activity data growth, especially IP and exports.

And while Q1 GDP and activity data are likely be strong, and the fall in March IP and exports growth are likely to be mostly the result of the Chinese New Year distortions, Chinese policymakers cannot rule out the possibility that growth has already started to slow with many companies and observers voicing concerns about the impact of weak broad credit growth, tight controls on local government financing and strong exchange rate against the dollar. As we showed last night, China's Credit impulse has already cracked and is down to nearly 3 year lows, suggesting that instead of inflation, Beijing is about to start exporting deflation once again, forcing the Fed to soon cut rates and launch more QE.


LetThemEatRand tmosley Wed, 04/11/2018 - 19:55 Permalink

If I had to pick a single reason Trump won the election, it was his promise of tariffs on Chinese goods.  It was certainly one of the reasons I voted for him, even though I have no direct dog in the fight as I am not in the manufacturing sector.  But I do believe a strong middle class is essential to this country remaining a place worth living in.   So far what Trump has done is more noise than substance, and he's now well into the 2nd quarter.  Manufacturing jobs have declined under his watch and the targeted tariffs he has advocated are FAR less than is needed.  But call me a cuck if that makes you feel better about Trump's obvious failure as a President thus far.

In reply to by tmosley

bIlluminati Brazen Heist Wed, 04/11/2018 - 20:28 Permalink

Or perhaps Goldman Sachs and similar will find that mathematics works for the just and the unjust. The Chinese have been running a bust-out sale for a while now. When Goldman looks around the table to see who the sucker is, they will eventually notice:

1. The table is gone;

2. The antes are gone;

3. The register where you buy chips with real money and convert back is closed, and has no real money. But Goldman Sachs may still have $62 trillion notional in chips.

In reply to by Brazen Heist

besnook Wed, 04/11/2018 - 19:49 Permalink

....unless the usa continues to be an asshole then we reserve the right to use whatever means necessary to remind the usa who really owns the dollar.

Cutter Wed, 04/11/2018 - 19:54 Permalink

He is saying they won't devalue as part of the trade war.  He isn't saying they won't devalue because they have to to recapitalize their banks.  

Haven't we learned yet not to believe a word Central Bankers utter?

truthalwayswinsout Wed, 04/11/2018 - 20:02 Permalink

And since when have the Chinese Communists ever told the truth? Say one thing and do another.

Trump is making a big mistake. He needs to escalate the sanctions because the Chinese have been screwing us for 30 years and they have already put tariffs on everything we export to them including food. 

They use our treasuries for fractional banking on a governmental scale and leverage not just 10 to 1 but 50 to 1 and doubling down on the sanctions will cause so much turmoil and fiscal instability that the Communist Party will not survive.

Time to double down and push even harder.

ilovetexas Wed, 04/11/2018 - 21:37 Permalink

Isn't this simple? Yuan is trying to become a major reserve currency. Depreciation only harms this attempt. Yuan may not appreciate, but certainly wouldn't depreciate. This is common sense! Stop fooling the fools on this site! Lol.

Don't give me the crap that any currency is free to float. Every country interferes. Period!

roddy6667 Wed, 04/11/2018 - 22:00 Permalink

China's largest weapon against America in a tariff war are not government regulations or responses, it's the buying choices of its citizens. They vote with their wallets. Recently, due to a dispute with Japan over some islands, Chinese retail buyers boycotted Japanese brands and stores. Uniqlo had to close hundreds of stores in China. When the Lotte family gave land to the South Korean government to install missiles close to China, Kia and Hyundai sales went into the toilet and are still there.

Most of the American car companies have factories in China that bring billions of dollars in profits back to the US. GM makes more cars and more profit in China than in America. This can all change overnight. Watch the Big Three start begging for handouts again.

There are thousands of American companies doing big business in China. Just walking around I see KFC, Pizza Hut, McDonalds, Starbucks, Apple, Microsoft, Gillette, Coca-Cola, Pepsi, Intel, and  all the clothing brands including Nike and Converse, all the American movies and TV shows. That's just a small sample. 

The Chinese people have choices. American customers have been buying "cheap Chinese junk" for over a decade because that's all they can afford. It's a flag-waver's fantasy to believe that Americans will pay $30 for a single T-shirt or $100 for a cheap pair of shoes in order to Buy American.