Tim Condon, Chief Economist at ING, credits the PBOC’s steadier USDCNY fixing policy for stemming capital outflows and is reviewing their 6.47 yearend USDCNY forecast for upward revision.

Key Quotes

“The April trade data released yesterday lessened our fear that the pronounced slowdown in export growth in January-March would persist. The -1.8% YoY growth put year-to-date growth at -7.7%, up from -9.6% in March. We revise our full-year forecast to -6.8% from – 9.1%.

The 10.9% contraction in imports in April was more than double the consensus forecast. Unlike in in Korea where petroleum, petroleum product and gas imports explain the majority of the import decline, machinery and transport equipment imports explain a larger share of the decline in China. Based on ING’s US$40 yearend oil price forecast our full-year import growth forecast is -11.1% and our trade surplus forecast is US$635bn, up from US$603bn in 2015.

April foreign reserves data released on Saturday allayed fears that the 1.1% depreciation of the CFETS RMB index in April despite the 1.9% average DXY depreciation would trigger capital outflows. Foreign reserves increased for a second consecutive month to US$3.219trn, up US$6.4bn from March. We believe the authorities can live with capital outflows as long as foreign reserves stay above US$3trn, implying monthly declines of c.US$20bn.

We credit the PBOC’s steadier USDCNY fixing policy for stemming capital outflows. We are reviewing our 6.47 yearend USDCNY forecast (spot 6.50, Bloomberg consensus 6.67, NDF 6.62) for upward revision on our view that the authorities seek to maximize NEER depreciation subject to keeping USDCNY flat or nearly flat – at most low single-digit CNY depreciation.”