PBOC Declares Yuan Fix to 3-week High Week, Stronger than Forecast

The People's Bank of China (PBOC) set the midpoint rate (CNY=PBOC), the yuan pegged trade boundaries in a 2% band, at 7.0994 per dollar, 69 pps higher than the previous fixing of 7.1063 on April 30. This Monday's guidance fix was the strongest since April 15.

Recent wide media speculation about a sharp devaluation of the still tightly managed Chinese yuan seem unfounded, given China's huge manufacturing trade surplus and a balance of payments surplus of about 2% of GDP.

But Japan's larger surplus has not stopped the yen from falling sharply. China can follow suit. A stronger U.S. dollar is partly to blame, but in China it's mainly due to continued declines in interest rates, financial conditions and geopolitical influences.

Exports are strong given China's strong foreign trade position. However, significant changes in distribution and income policies are needed to enhance domestic consumption demand. The government is expected to announce fiscal income and consumption support targets for households, raising funds by withdrawing support from businesses and government entities, thereby at least temporarily offsetting the incentive for capital to leave the country. However, this would involve an unlikely political reversal.