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Monday, June 21, 2010

CNY Reform, not Reval

TDL Research | CNY Reform, not Reval

PBoC Announces RMB Reform/Flexibility
Saturday, the PBoC announced it would proceed further with RMB
exchange rate reform. While the precise timing was a bit of a surprise, many
Philip Dunham expected a change in policy away from the CNY pseudo peg which had been in place
philip.dunham@davianletter.com since late summer 2008 as the financial crisis approached its most intense stage and
(985)789-5445 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

In Focus:
PBoC announces return to exchange rate
flexibility.

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.

CNY Reform, not Reval

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Monday, June 21, 2010

China CPI (YoY%)

8

-2

-4

-6

-8

-10

-12

China CPI (YoY%)

Source - Datastream

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Monday, June 21, 2010

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