Is The Yuan About To Tumble After Friday’s Shocking PBOC News? Here Is Goldman’s Take

In a move that stunned China currency watchers, late on Friday (local time) Bloomberg reported that China’s central bank decided that it would remove a
 reserve requirement for financial institutions trading in FX forwards for clients by cutting it to zero from 20% currently. The change would take place on Monday, September 11 (it has yet to be confirmed). As a reminder, banks, funds and other financial institutions trading FX forwards for clients were required from October 2015 to set aside 20% of the past months’ sales as reserves in a move that was aimed at curbing currency speculation. Subsequently, the PBOC further punished traders, or rather shorts, by boosting short-term margin requirements on FX positions, making it virtually impossible to hold on to a short position for a long period of time.

All that changed at the end of last week, when the PBOC effectively “U-turned”, and gave a green light to the same FX speculators whom it criticized (remember the Chinese anti-Soros media campaign), slammed, punished, and in some cases arrested, to now short the Yuan once more.

The reason behind the move was simple: in recent weeks the Yuan, both on and offshore, had soared far too high, to the point where Beijing was getting worried about its impact on exporters, as a separate Friday report from Reuters discussed.

On the surface, this was a brilliant solution to Beijing’s problems: it lowers the Yuan on one hand, and on the other, it is not the PBOC who is manipulating the currency, it’s the evil speculators who are “guilty”, avoiding being blamed by the US for currency manipulation. Most importantly, the removal of this marginal capital control worked immediately, as the following intraday chart of Friday’s USDCNH clearly showed.  

So will this plan work, and is the Yuan set to plunge in Monday trading? We will find out soon enough, but until then, here is the explanation from Goldman’s MK Tang on what Friday’s move means, and its implications for Yuan policy, but first, here are several analyst opinions, as summarized courtesy of Bloomberg:

CIB Research (Guo Jiayi, Zhang Meng, analysts)