“PBOC Governor Zhou finally re-surfaced. In an interview with Caixin he downplayed the importance of hot money as a source of CNY depreciation pressure. He identified two sources of pressure: the repayment of USD-denominated debt, where he noted that there was “a fairly large amount…over US$800bn in 2014.” This, he said, was a healthy development – capital flow rather than flight – whose transitory pressure would subside.
In identifying a second source of CNY depreciation pressure we think Governor Zhou signalled the next step in exchange controls/macroprudential measures. A large number of export enterprises were leaving their export proceeds offshore – “waiting in the wings” – to repatriate at a more favourable exchange rate. Governor Zhou said such pressure also would be transitory as the enterprises would eventually repatriate the proceeds to pay wages, etc. We expect an imminent PBOC tightening of rules on the repatriation of export proceeds.
Governor Zhou’s calming remarks contrast with the description of capital flight – “smurfing” – in a New York Times article headlined “Chinese Start to Lose Confidence in Their Currency.”
Uncertainty about the relative magnitudes of capital flow and capital flight is a source of global financial market volatility. We remain of the view that China will progressively tighten capital controls/macroprudential measures to free it to cut interest without having to worry about CNY depreciation pressure.”
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