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Chief economist update: Get shorty

The People's Bank of China (PBOC) cut the foreign exchange risk reserve ratio for forward contracts to 0% from 20% over the weekend, effectively giving its blessing to currency traders to "get shorty".

The PBOC imposed the 20% risk reserve ratio two years ago to contain what was then a fast depreciating Chinese yuan. It's now working to restrain the currency's move higher versus the US dollar, which has appreciated by 3.4% this year to date and by 6.2% from the 2020 low of CNY7.1542/US$ recorded in late May.

Investors are flocking to China for good reasons.

While many other nations around the globe continue to battle the coronavirus pandemic - first wave or second - through social restrictions and lockdowns, China has re-opened for business months before, underscored by the "Wuhan pool party" back in August.

This was followed by the China's "Golden Week" holiday (1-7 October) that, according to the government, saw 637 million people travel within the country.

"The government estimates domestic travellers generated around 466 billion yuan ($68.6 billion) in tourism revenue during the holiday period." (CNBC)

While the Financial Times report that this is well below 2019's total of 782 million trips, it's still the stuff that other nations in lockdown - re-imposed or otherwise - only dream of.

China is one of the very few countries that have dodged the global recession - growing by 3.2% in the year to the June quarter after slumping by 6.8% in the previous one. With the pandemic behind it the politburo can focus on strengthening the economy and with lesser strain on its monetary and fiscal balances.

This isn't lost on investors.

China's relatively stronger growth has pushed the Shanghai Composite index up by 10.1% this year to date - outperforming the S&P 500 (9.4%); the Nikkei-225 (-0.4%); the Stoxx-50 (-11.9%); the FTSE-100 (-20.4%); and the All ordinaries index (6.8%).

China's debt market also offers better returns. Chinese 10-year bonds currently yields around 3.23%. This compares with 0.78% for the US; -0.54% in Germany; 0.03% in Japan; 0.28% in the UK; and 0.85% in Australia.

On top of these all, PBOC governor Yi Gang is taking a prudent approach towards monetary policy by not following Western economies by undertaking a large-scale monetary loosening, but will instead look to consumer price stability and exchange rates to help the economy recover.

Instead, the PBOC will maintain reasonable liquidity, money supply and aggregated financing, while avoiding flood of liquidity.

It could afford to do so given relatively better economic and financial market conditions.

Read our full COVID-19 news coverage and analysis here.

Read more: PBOCBank of China
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